Under purchasing power parity (PPP), if U.S. monetary growth leads to a long run doubling of the U.S. price level, while Germany's price level remains constant, PPP predicts that the
A) long-run DM price of the dollar will be doubled.
B) long-run DM price of the dollar will be halved.
C) long-run DM price of the dollar will remain the same.
D) short-run DM price of the dollar will be halved.
E) short-run DM price of the dollar will be doubled.

Question

Quizplus · Accepted Answer

According to PPP, in the long run, the exchange rate between two countries should adjust so that the same basket of goods costs the same in both countries. If the U.S. price level doubles, while Germany's price level remains constant, it means that the U.S. dollar has lost its purchasing power relative to the German mark. Therefore, the DM should appreciate to restore equilibrium. The long-run DM price of the dollar should be halved, which means that one dollar will buy half the amount of the DM compared to before.

Under Purchasing Power Parity (PPP), If U