If the U.S.price level is increasing by 3 percent annually and the Swiss price level is increasing by 5 percent annually,by what percent would the dollar price of francs need to change according to purchasing power parity?
A)decrease by 5 percent
B)decrease by 2 percent
C)increase by 5 percent
D)increase by 2 percent

Question

Quizplus · Accepted Answer

According to purchasing power parity, the exchange rate between two currencies should adjust to reflect the difference in inflation rates. Therefore, if the Swiss price level is increasing by 5 percent and the U.S. price level is increasing by 3 percent, the Swiss franc should depreciate by the difference in inflation rates, which is 2 percent. Therefore, the dollar price of francs would need to decrease by 2 percent according to purchasing power parity.

If the USprice Level Is Increasing by 3 Percent Annually and the and the Swiss