Answer (D) is correct . When the rate of inflation in a given country rises relative to the rates of other countries, the demand for that country’s currency falls. This inward shift of the demand curve results from the lowered desirability of that currency, a result of its falling purchasing power. As investors unload this currency, there is more of it available, reflected in an outward shift of the supply curve. A new equilibrium point will be reached at a lower price in terms of investor’s domestic currencies. Also, the new equilibrium quantity could be either higher or lower than the old quantity.
Answer (A) is incorrect because Higher relative inflation in a foreign country results in an increase in purchasing power for the domestic currency, reflected in a new equilibrium price below the old price.
Answer (B) is incorrect because Higher relative inflation in a foreign country results in an increase in purchasing power for the domestic currency, reflected in a new equilibrium price below the old price. Also, the new equilibrium quantity could be either higher or lower than the old quantity.
Answer (C) is incorrect because The new equilibrium quantity could be either higher or lower than the old quantity.
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