Imagine inflation in Australia is rising at a much faster rate than in China, making Chinese products relatively cheaper for Australians and other foreigners. Which of the following effects is likely?

Question

BlackTom AI · Accepted Answer

Higher Australian inflation makes Australian goods and services more expensive relative to Chinese goods, so demand shifts toward the cheaper Chinese products and, in foreign exchange markets, toward Chinese currency — causing the Chinese currency to appreciate.

1. Relevant knowledge points and concepts
- Relative inflation affects relative prices of domestic vs foreign goods (real exchange rate/relative price effect).
- Demand for a foreign currency rises when domestic residents buy more foreign goods (they need foreign currency to pay).
- An increase in demand for a currency (holding supply constant) tends to make that currency appreciate.
- Purchasing Power Parity (PPP) intuition: higher domestic inflation tends to be associated with depreciation of the domestic currency relative to lower-inflation countries.

2. Step-by-step reasoning
- If Australian inflation is much higher than Chinese inflation, Chinese goods become relatively cheaper for Australians and other foreigners.
- Australians (and foreigners comparing prices) substitute toward the relatively cheaper Chinese products → imports from China rise, and demand for Chinese exports rises.
- To buy those Chinese goods, buyers must acquire Chinese currency, increasing demand for the Chinese currency in foreign exchange markets.
- Increased demand for Chinese currency leads to its appreciation relative to the Australian dollar.

3. Numerical illustration (intermediate steps)
- Suppose a Chinese good costs 100 CNY and initial exchange rate is 1 AUD = 5 CNY → price in AUD = 20 AUD.
- Australia experiences 10% inflation; comparable Australian good rises from 20 AUD to 22 AUD, while the Chinese good price in AUD remains 20 AUD (still cheaper).
- Australians buy more Chinese goods, increasing demand for CNY. This demand pressure tends to move the exchange rate so that 1 AUD buys fewer CNY → CNY appreciates.

4. Why the correct answer is correct
- Answer (a) directly follows from increased foreign demand for Chinese currency to pay for the relatively cheaper Chinese goods; that appreciation is the expected exchange-rate response to the relative inflation differential.

5. Why other options are incorrect
- (b) is wrong: foreigners would not buy more Australian exports; they would buy less because Australian goods are relatively more expensive. 
- (c) is wrong: Australia selling more exports to China is the opposite of expected substitution (Australia would export less or import more). 
- (d) is wrong: the Australian currency would tend to depreciate (not appreciate) when its inflation is higher than China’s.

6. Conclusion
- Therefore the Chinese currency will appreciate, matching the provided correct answer (a).

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希望你的学习变得更简单

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