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Posted 2 months ago

Expansionary monetary policy in Maxistan has increased the rate of inflation in Maxistan to 12%12 \%. The current rate of inflation in lle is 1%1 \%.

Which of the following graphs correctly shows the impact of the decrease in relative prices on the exchange rate for the Maxistan peso?

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Answer from Sia
Posted 2 months ago
Solution by Steps
step 1
Consider the effects of expansionary monetary policy in Maxistan, which leads to a higher inflation rate in Maxistan compared to Ile
step 2
Higher inflation in Maxistan relative to Ile would decrease the value of Maxistan's currency, meaning that more pesos would be required to purchase the same amount of goods and services
step 3
This decrease in value would be represented by a shift in the supply curve of the Maxistan peso to the right, as more pesos are supplied at each exchange rate level
step 4
The demand curve for the Maxistan peso would remain unchanged if the change in relative prices is solely due to Maxistan's inflation and there are no other changes affecting the demand for pesos
step 5
Among the given options, the graph that shows a rightward shift in the supply curve with an unchanged demand curve would correctly represent the scenario
Key Concept
Exchange rate determination and the effects of inflation on currency value
Expansionary monetary policy leading to higher inflation in a country typically results in the depreciation of that country's currency, which is depicted as a rightward shift in the supply curve on a supply and demand graph for the currency exchange rate.

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