If the purchasing power of a dollar is less than the purchasing power of the Mexican peso,purchasing power parity would predict that
A) in the short run, the dollar will appreciate relative to the peso to equalize the purchasing power of the dollar and the peso.
B) in the short run, the dollar will depreciate relative to the peso to equalize the purchasing power of the dollar and the peso.
C) in the long run, the dollar will appreciate relative to the peso to equalize the purchasing power of the dollar and the peso.
D) in the long run, the dollar will depreciate relative to the peso to equalize the purchasing power of the dollar and the peso.

Question

Quizplus · Accepted Answer

Purchasing power parity theory states that in the long run, exchange rates will adjust to equalize the purchasing power of different currencies. If the purchasing power of a dollar is less than the purchasing power of the Mexican peso, then the dollar will appreciate relative to the peso in the long run to equalize their purchasing power.

If the Purchasing Power of a Dollar Is Less Than