If the home inflation rate is 9% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:

Question

Quizplus · Accepted Answer

According to relative purchasing power parity, the exchange rate between two countries should adjust by the difference in their inflation rates. In this case, the home country has a higher inflation rate than the foreign country, so its currency should depreciate (fall in value) by the difference, which is 4%. Therefore, the answer is D.

If the Home Inflation Rate Is 9% and the Foreign