Suppose hypothetically that the inflation rate in Britain was 6%, and the inflation rate in the U.S. was 4%, under the theory of purchase power parity, what should happen to the value of the British pound in U.S. dollars?

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity, the exchange rates between two countries should adjust to match the inflation rates in each country. So in this case, the British pound should depreciate relative to the US dollar by the difference in their inflation rates, which is 2%. Therefore, the correct answer is option D, the pound should fall by 2%.

Suppose Hypothetically That the Inflation Rate in Britain Was 6