If the foreign currency is anticipated to appreci:ate with respect to the domestic currency and the relative purchasing power parity condition is satisfied, then
A) people expect higher inflation in the foreign nation than in the domestic nation.
B) people expect higher inflation in the domestic nation than in the foreign nation.
C) people anticipate that uncovered interest parity will hold true.
D) people anticipate that covered interest parity will hold true.

Question

Quizplus · Accepted Answer

When the foreign currency is expected to appreciate with respect to the domestic currency and the relative purchasing power parity condition is satisfied, people expect higher inflation in the domestic nation than in the foreign nation. This is because the relative purchasing power parity condition states that, in the long run, exchange rates will adjust to equalize the cost of a basket of goods and services between two countries. Therefore, if the foreign currency is expected to appreciate, it means that the cost of goods and services in the foreign nation will decrease, indicating lower inflation in the foreign nation compared to the domestic nation.

If the Foreign Currency Is Anticipated to Appreci:ate with Respect