foreign currency will, on average, depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

Question

Quizplus · Accepted Answer

This is known as purchasing power parity theory, which suggests that exchange rates should adjust so that a basket of goods and services in one country is equivalent in value to a basket of goods and services in another country, taking into account exchange rates and inflation rates. Therefore, if a country has higher inflation than the U.S., its currency should depreciate against the U.S. dollar to maintain this balance.

Foreign Currency Will, on Average, Depreciate Against the U