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The currency in country X is the Krone while coujntry Y uses the Euro. Country Y has recently experienced an increase in its exchange rate with Country X. Which of the following effects is likely to result in Country Y?
A) A stimulus to exports in Country Y
B) An increase in the costs of imports from Country X
C) Reducing demand for imports from Country X
D) A reduction in the rate of cost push inflation.The answer to the question is D. But I don’t quite undertsand why an appreciation of Euro will cause a reduction in the rate of cost push inflation, as an appreciation of Euro will cause a reduction in the net export, decreasing the aggregate demand, leading to a reeduction in demand pull inflation, instead of a reduction of cosh push inflation.
Thanks and looking forward to your reply!
So, lets use some figures.
Say current exchange rate is 1 Euro (country y) = 1.5 Kron (country x)
If the question means by the phrase ‘..experienced and increase in its exchange rate…’, then the exchange rate might move to 1 Euro (country y) = 1.8 Kron (country x)
If goods that in country x that had cost 2000 Kron and were imported by country y, they would have cost 2000/1.5 = 1333 euro. They would now cost 2000/1.8 = 1111 euro.
This will decrease cost push inflation in country y.
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