Suppose that the inflation rate is higher in Turkey than in the U.S. for the next six months. Then according to purchasing power parity, if exchange rates are given in terms of how many Turkish lira or how many Turkish goods a U.S. dollar buys,
A)the nominal exchange rate rises but the real exchange rate does not.
B)the nominal exchange rate does not rise, but the real exchange rate does.
C)both the nominal and real exchange rates rise.
D)neither the nominal nor the real exchange rate rises.

Question

Quizplus · Accepted Answer

According to purchasing power parity, the nominal exchange rate will adjust to offset differences in inflation rates between two countries, so it will rise. However, the real exchange rate, which accounts for price level differences, remains unchanged.

Suppose That the Inflation Rate Is Higher in Turkey Than