According to the purchasing power parity,if the price level in the US rises relative to Mexico
A)The dollar will appreciate relative to the peso
B)The dollar will depreciate relative to the peso
C)There is no effect on either currency
D)None of the above

Question

According to the purchasing power parity,if the price level in the US rises relative to Mexico​
A)​The dollar will appreciate relative to the peso
B)The dollar will depreciate relative to the peso
C)There is no effect on either currency
D)​None of the above

Quizplus · Accepted Answer

According to the purchasing power parity, if the price level in the US rises relative to Mexico, the US dollar will depreciate relative to the Mexican peso. This is because the increase in the price level in the US will cause a decrease in the relative value of the US dollar compared to the Mexican peso, making Mexican goods relatively cheaper than US goods. As a result, US consumers will demand more Mexican goods, increasing the demand for Mexican pesos and causing the exchange rate to adjust accordingly.

According to the Purchasing Power Parity,if the Price Level in the US