The purchasing power parity predicts that if US price level rises relative to the Mexico price level,then
A)Dollar value will rise relative to the peso
B)Dollar value will fall relative to the peso
C)There is no effect on either currency
D)PPP predicts price level will normalize in the long-run

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, if the price level in the US rises relative to Mexico, the US dollar's value will fall relative to the Mexican peso. This is because a higher price level in the US means that the US dollar will buy fewer goods and services, making it less valuable relative to the Mexican peso. As a result, the exchange rate will adjust to equalize the purchasing power of the two currencies, leading to a depreciation of the US dollar relative to the Mexico peso.

The Purchasing Power Parity Predicts That If US Price Level