Suppose the inflation rate over the last 20 years has been 10 per cent in the UK, 7 per cent in Japan, and 3 per cent in the USA. If purchasing power parity holds, which of the following statements is true? Over this period,
A) the value of the dollar should have fallen compared to the value of the pound and the yen.
B) none of these answers
C) the yen should have fallen in value compared to the pound and risen compared to the dollar.
D) the value of the pound should have risen compared to the value of the yen and the dollar.
E) the yen should have risen in value compared to the pound and fallen compared to the dollar.

Question

Quizplus · Accepted Answer

According to purchasing power parity, a currency with a lower inflation rate should appreciate relative to a currency with a higher inflation rate. Thus, the yen (7% inflation) should appreciate against the pound (10% inflation) and depreciate against the dollar (3% inflation).

Suppose the Inflation Rate Over the Last 20 Years Has