The empirical evidence on purchasing power parity over the long run seems to point out that:
A) the higher a country's inflation rate, the greater is the appreciation in the country's currency.
B) the theory of purchasing power parity cannot explain long-run changes in exchange rates.
C) the higher a country's inflation rate the greater is the depreciation in the country's currency.
D) there isn't any clear link between inflation rates and exchange rates.

Question

Quizplus · Accepted Answer

The empirical evidence suggests that there is a negative relationship between a country's inflation rate and the value of its currency in the long run. This means that as a country's inflation rate increases, its currency tends to depreciate in value. This relationship is consistent with the theory of purchasing power parity, which suggests that in the long run, exchange rates should adjust to reflect differences in inflation rates between countries. Therefore, choice C is the correct answer. Choice A is incorrect because it implies that higher inflation leads to currency appreciation, which is not supported by the evidence. Choice B is also incorrect because the theory of purchasing power parity has been found to explain long-run changes in exchange rates. Choice D is incorrect because the evidence suggests a clear link between inflation rates and exchange rates in the long run.

The Empirical Evidence on Purchasing Power Parity Over the Long