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Assume that inflation in Australia and New Zealand are currently equal at 4%
Assume that inflation in Australia and New Zealand are currently equal at 4%. New information has arrived, suggesting that Australia can expect significantly higher inflation growth over the next year. In this case, PPP theory would predict Australia’s imports to ________, exports to ________, and the Australian dollar to _______ against the New Zealand dollar.
| A. |
Increase; decrease; depreciate. |
|
| B. |
Decrease; increase; appreciate. |
|
| C. |
Decrease, decrease, appreciate. |
|
| D. |
Increase, decrease, appreciate. |
|
| E. |
None of the options. |
Expert Solution
According to purchasing power parity theory, if the inflation rate is increased in australia the conversion value of Aus dollar to Newzealand dollar decreases.
if the value of australia dollar decreases the amount payable on the imports will be increased which leads decrease in the value of Imports .
Due to inflation, if the value of australian dollar decreases then more australian dollar will be realized at the time of conversion of newzealand dollar to australian dollar. if the exports are made amount will be receivable in Newzealand currency, thereby more realization in australian dollar. so obviously exports will be increased to realize the foreign exchange gain.
If inflation in australia increases then australian dollar value will be depreciated against the new zealand dollar.
Option "e" has to be selected
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