What are the exchange rate theories and how does inflation affect the exchange rate?

1. Important exchange rate theories are: purchasing power parity theory, which holds that the transmitted exchange rate will tend to make the cost of buying trade goods at home equal to the cost of buying these goods abroad, and countries with inflation rate will tend to depreciate their currencies; Hume's adjustment mechanism is based on the quantitative theory of price (a theory to analyze the overall price level in macroeconomics), which holds that the overall price level in an economy is directly proportional to the money supply;

2. Inflation will make the exchange rate rise, that is, the local currency will depreciate; However, if the internal devaluation is greater than the external devaluation, it can constitute the conditions for foreign exchange dumping and promote exports. An example is: Before World War I, the exchange rate of the German mark against the US dollar was 1 US dollar, which was equal to 4 German marks. Suppose a commodity worth DM 3.5 was sold in the US market at the price of 1 USD at that time, German exporters could make a profit of DM 0.5 when exporting the commodity to the US. After World War I, the German mark depreciated sharply. Suppose that the German mark depreciates to one in 20 million for goods in the domestic market and one in 40 million for dollars. In this case, if the price in the US market remains unchanged, German exporters can buy goods at home with 70 million yuan (3.5 * 20 million yuan), but the dollars sold in the US market can be exchanged for 650 million yuan.