Answer :
The statement that is true regarding inflation and currency exchange is:
Inflation can affect currency exchange rates and lead to changes in trade demand.
Here's an explanation:
1. **Inflation and Currency Exchange Rates**: Inflation refers to the general increase in prices of goods and services in an economy over a period of time. When inflation occurs, the value of a currency decreases because more of that currency is needed to purchase the same goods or services due to the rising prices.
2. **Currency Exchange Rates**: Currency exchange rates, on the other hand, indicate the value of one currency in terms of another. These rates can fluctuate based on various factors, including inflation.
3. **Impact of Inflation on Currency Exchange Rates**: When there is high inflation in a country, the value of its currency may decrease in the foreign exchange market. This is because the purchasing power of that currency is eroded by inflation, making it less desirable compared to currencies from countries with lower inflation rates.
4. **Changes in Trade Demand**: As a result of inflation affecting currency exchange rates, changes in trade demand can occur. A country experiencing high inflation may find its exports less competitive in the international market due to the depreciation of its currency. Conversely, imports may become more expensive, impacting trade balances.
In conclusion, inflation can indeed influence currency exchange rates, which in turn can have repercussions on trade demand between countries. This relationship highlights the interconnectedness of economic factors on a global scale.
