If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 pesos now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then:

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Quizplus · Accepted Answer

The purchasing-power parity theory states that the exchange rate between two currencies should be equal to the ratio of the price levels in the two countries. In this case, the price level in Chile has increased by 100% over the past ten years, while the price level in the United States has increased by 25%. This means that the Chilean peso has depreciated against the US dollar, and it now takes more pesos to buy the same amount of goods and services in Chile. Therefore, traveling in Chile is more expensive now than it was ten years ago.

If a Dollar Bought 1,000 Chilean Pesos Ten Years Ago