exchange rate movements and inflation. (1 Viewer)

[elliottjohnson]

Can someone please 'outline the relationship between exchange rate movements and inflation'.


thanks! :]

 

[Meepo]

An increase in inflation will cause a depreciation in the australian dollar/currency/exchange rate. Too much money/credit flowing in the economy decreases of the nation currency rate.
Low inflation causes an appreciation in the australian dollar/currency/exchange rate. Less money/credit flowing in the economy increases the value of the nation currency rate.

 

[Omar-Comin]

please refrain from using what the person above said

 

[danal353]

when there is an appreciation - imports become cheaper, as well as imported inputs, thus lowering prices and easing inflation

alternatively when there is a depreciation, imports and imported inputs become more expensive, leading to imported inflation (ie increasing inflationary pressures)

 

[waryap]

in regards to this question, is it not necessary to also write about the RBA and the government?

well, if so... then I shall add my part here.

It is obvious that inflation will cause depreciation of the Australian exchange rates because of the increased cash rates caused by the RBA selling their bonds with the banks therefore increasing the cash rates. The use of this concept between inflation and the RBA contributes to the added factor that things may become more expensive because the Australian dollar has depreciated, so buying things such as petrol will become much much more expensive. Either that or the countries supplying the petrol have a low supply and high demand curve for their product.

Okay, I think I'm blabbing on faillllll

 

[akatsukisan]

Yes you do need to talk about RBA.
High inflation= High interest rates (for obvious reasons) = appreciation, especially so when Australian/domestic interest rates are higher relative to world interest rates - there'll be an increase in demand for AUD's (shifting the demand curve to the right, hence leading to an appreciation) in order to take advantage of the interest rate differentials
Low inflation = low interest rates (for obvious reasons)= depreciation, especially so when Australian/domestic interest rates are lower relative to world interest rates - there'll be an increase in supply of AUD's (shifting the supply curve to the right, hence leading to a depreciation) as investors seek higher returns on their investments elsewhere.

when there is an appreciation - imports become cheaper, as well as imported inputs, thus lowering prices and easing inflation

alternatively when there is a depreciation, imports and imported inputs become more expensive, leading to imported inflation (ie increasing inflationary pressures)

This is another way of looking at it.

And may I ask why do you want to know about such a relationship at all? I don't recall ever having to deal with such a relationship in eco.

 

[danal353]

And may I ask why do you want to know about such a relationship at all? I don't recall ever having to deal with such a relationship in eco.

I learnt it under topic 3 - economics issues: inflation

 

[Simo91]

In a globalised world it plays a big role in determining inflation within the country (mainly through imported inflation) so i don't know how you've not dealt with this relationship akatsukisan.