Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that

Question

Quizplus · Accepted Answer

The high inflation in Turkey will lead to a decrease in the purchasing power of the Turkish currency, causing it to depreciate against the U.S. dollar. Therefore, option A is the correct choice. Option B is incorrect because interest rate parity is a concept related to interest rates rather than inflation rates. Option C is incorrect because high inflation in Turkey will not lead to an appreciation of its currency. Option D is incorrect because the question does not provide any information to suggest that the dollar will depreciate.

Suppose That U