If exchange rates and prices are such that a CD purchased in the U.S. is less expensive than a CD purchased in Mexico, purchasing power parity predicts that the demand for dollars will and the supply of dollars will .

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity, in the scenario described, there will be an increased demand for dollars as people will want to purchase CDs from the US at a lower cost. This increased demand for dollars will lead to an appreciation of the dollar in relation to the Mexican peso. As a result, the supply of dollars will decrease as Mexicans will want to hold on to their pesos, which will now have a lower purchasing power in USD.

If Exchange Rates and Prices Are Such That a CD