Suppose that the current spot exchange rate of U.S.dollars for Russian rubles is $0.15/1ruble.The price of Russian-produced goods increases by 8 percent, and the U.S.price index increases by 3 percent. According to PPP, the 8 percent rise in the price of Russian goods relative to the 3 percent rise in the price of U.S.goods results in a(n)
A)depreciation of the Russian ruble by 5 percent.
B)depreciation of the Russian ruble by 6 percent.
C)appreciation of the Russian ruble by 5 percent.
D)appreciation of the Russian ruble by 6 percent.
E)depreciation of the Russian ruble by 7 percent.

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) suggests that exchange rates will adjust to offset changes in price levels between two countries. Here, Russian goods' prices increased by 8% while U.S. goods' prices increased by 3%. The difference (8% - 3% = 5%) indicates how much the Russian ruble should depreciate relative to the U.S. dollar to maintain purchasing power parity.

Suppose That the Current Spot Exchange Rate of U