Assume that U.S. inflation is expected to surge in the near future. The expectation of a surge in inflation will most likely place ____ pressure on the U.S. dollar immediately.

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BlackTom AI · Accepted Answer

When considering how markets foresee a rise in inflation, financial logic indicates that a higher inflation outlook tends to erode the value of a currency in the near term because it reduces real returns and can prompt expectations of tighter monetary policy later, which may be priced in but often with initial volatility.
Option 1: 'Upward' — This would imply the dollar strengthens on an inflation surge, which contradicts the typical immediate reaction where higher inflation reduces real purchasing power and, unless offset by anticipated monetary tightening, can depress the currency. Therefore this is unlikely in the immediate term.
Option 2: 'Downward' — This aligns with standard expectations that, in the near term, rising inflation reduces the currency’s value as investors demand higher yields or move to hedge, and the immediate reaction tends to be depreciation rather than appreciation. Hence this is a plausible immediate effect on the dollar.
Option 3: 'No' — Assuming a surge in inflation, there is generally some price reaction in the currency markets, so saying there would be no pressure is inconsistent with typical market behavior where inflation expectations influence exchange rates.
Option 4: 'cannot be determined' — While predicting currency moves involves many factors, a straightforward impulse response to an expected inflation surge is to consider downward pressure unless there are offsetting, known policy actions or other constraints. Declaring that determination is impossible ignores the conventional link between inflation expectations and currency value in the short term.

BUSFIN 4250 SP2025 (4534) Carmen Quiz 2 on wk 3 and 4 - Honorlock

Assume that U.S. inflation is expected to surge in the near future. The expectation of a surge in inflation will most likely place ____ pressure on the U.S. dollar immediately.

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