qweewqqwe Posted March 27, 2015 Report Share Posted March 27, 2015 SO i have a question. How would the Depreciation of the currency lead to inflation.Shoudnt it leads to deflation? As the Currency devalues , the purchasing power decreases , less consumer spending and investment will be injected into the economy so Firms have to lower the price of their product,isnt it? I am confused,I have never done it in macro but can I put it into my commentary. 1 Reply Link to post Share on other sites More sharing options...
EconDaddy Posted March 27, 2015 Report Share Posted March 27, 2015 (edited) Hi, It's simple, but first let's look at what depreciation and inflation are:Depreciation: the decrease of the (free market) exchange rate of a currency. It means that a currency's value falls in terms of other currencies.Inflation: the (sustained) increase of the average price level.So the depreciation of our currency means we have to pay more for the goods that we import from abroad (as the same amount of foreign currency can only be bought now with a larger amount of domestic currency). If we import a lot from abroad (especially goods that have an inelastic PEDm) then the increased price we have to pay for these goods will increase the average price level of the economy. This is what we call imported inflation. Let me know if there is anything you still don't understand. Check out my blog for articles. Thanks,EconDaddyIB Economics teacher/examiner Edited March 27, 2015 by EconDaddy Reply Link to post Share on other sites More sharing options...
qweewqqwe Posted March 27, 2015 Author Report Share Posted March 27, 2015 Hi, It's simple, but first let's look at what depreciation and inflation are:Depreciation: the decrease of the (free market) exchange rate of a currency. It means that a currency's value falls in terms of other currencies.Inflation: the (sustained) increase of the average price level.So the depreciation of our currency means we have to pay more for the goods that we import from abroad (as the same amount of foreign currency can only be bought now with a larger amount of domestic currency). If we import a lot from abroad (especially goods that have an inelastic PEDm) then the increased price we have to pay for these goods will increase the average price level of the economy. This is what we call imported inflation. Let me know if there is anything you still don't understand. Check out my blog for articles. Thanks,EconDaddyIB Economics teacher/examinerDo you think I can put it into my Macro commentary? 1 Reply Link to post Share on other sites More sharing options...
EconDaddy Posted March 27, 2015 Report Share Posted March 27, 2015 It depends on what your article is about.Thanks,EconDaddyIB Economics teacher/examinerwww.econdaddy.com Reply Link to post Share on other sites More sharing options...
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