If the inflation rate in New Zealand were to rise relative to the inflation rate in Russia, which of the following correctly explains what would happen to the
exchange rate for the New Zealand dollar in terms of Russian rubles
The exchange rate for the New Zealand dollar in terms of Russian rubles would decrease, as the higher inflation rate in New Zealand would make the New Zealand dollar less valuable relative to the Russian ruble.
The exchange rate between two currencies is influenced by various factors, including inflation rates. When the inflation rate in one country, in this case, New Zealand, rises relative to another country, Russia, it generally means that the purchasing power of the currency in the country with higher inflation is decreasing more rapidly compared to the country with lower inflation.
To understand what would happen to the exchange rate for the New Zealand dollar (NZD) in terms of Russian rubles (RUB) in this scenario, we need to consider the impact of relative inflation rates.
If the inflation rate in New Zealand rises relative to Russia, it means that prices of goods and services in New Zealand are increasing at a faster pace compared to those in Russia. This may result in a decrease in demand for New Zealand goods and services from Russian consumers, as they might find them relatively more expensive.
Now, let's look at the effect on the exchange rate:
1. Increase in supply and demand: As demand for New Zealand goods and services from Russia declines, there may be a decrease in the demand for the New Zealand dollar. This decrease in demand could lead to a decrease in its value relative to the Russian ruble.
2. Interest rate differentials: Another factor that affects exchange rates is interest rate differentials. If the inflation rate in New Zealand rises, the central bank might respond by increasing interest rates to curb inflation. Higher interest rates could attract foreign investors seeking higher returns on their investments, increasing the demand for the New Zealand dollar. This increased demand could partially offset the initial decrease driven by the inflation rate difference.
Overall, the impact of the inflation rate differential on the exchange rate for the New Zealand dollar in terms of Russian rubles would depend on the relative magnitude of these factors and other market influences. It is important to note that exchange rates are also influenced by a wide range of other economic, political, and market factors, so it's not a one-to-one relationship.