Paper 3 · Inflation and Money
A depreciation of a country's currency causes cost push inflation because it
Areduces the quantity of goods households are able to buy abroad
Braises the local currency price of every imported input firms use
Clowers the foreign currency price of the country's exported goods
Dincreases the amount of money the central bank has to print
Explanation: A weaker currency means more local money must be handed over for each unit of foreign currency, so imported fuel, raw materials, machinery and spare parts all cost more. Because those inputs go into almost everything produced, the increase spreads through the whole price level.
Derived from ZIMSEC Economics 4050/3 Paper 3, June 2023, Q10