How does inflation cause a country's currency to be overvalued with regard to the exchange rate?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Inflation is related to the economic stability and strength of a specific country. As the economy changes in a nation, the currency changes in value or buying power. However, relative to other nations, this inflation may not line up directly. For instance, if the economy weakens in Canada and a hamburger increases in price from $5 to $6 but the exchange rate from America to Canada doesn't change quickly enough, there will be a period of uneven exchange rates. For a short period of time, the American dollar will be a bit weaker because it is being exchanged for an amount of Canadian dollars that will be worth less due to inflation.

The opposite of this happened in Egypt after the recent uprisings—the exchange rate was drastically lowered a couple of weeks prior to when inflation caught up with it—meaning an American...

(The entire section contains 3 answers and 421 words.)

Unlock This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Start your 48-Hour Free Trial
Approved by eNotes Editorial Team