If the U.S.inflation rate is 3 percent annually and the Swiss inflation rate is 5 percent annually,by what percent would the dollar price of francs need to change according to purchasing power parity?
A) Depreciate by 5 percent
B) Appreciate by 3 percent
C) Appreciate by 5 percent
D) Depreciate by 2 percent
E) Appreciate by 2 percent.

Question

Quizplus · Accepted Answer

According to purchasing power parity, the exchange rate should adjust based on the inflation differential. Since the Swiss inflation rate is higher than the US inflation rate, the franc should depreciate relative to the dollar. The percentage change needed can be calculated as the difference between the inflation rates (5%-3% = 2%), which means the franc needs to depreciate by 2 percent relative to the dollar. Therefore, the correct choice is D.

If the USInflation Rate Is 3 Percent Annually and the Swiss Inflation