If Purchasing Power Parity is holding, what will happen to the currency of a country with high inflation?
A)Currency will appreciate.
B)Currency will depreciate.
C)No significant change in exchange rate.
D)Currency will sell at a forward premium.

Question

Quizplus · Accepted Answer

If Purchasing Power Parity is holding, it implies that the exchange rate should reflect the relative prices of goods and services in different countries. Therefore, if a country has high inflation, the prices of goods and services in that country will increase faster than in other countries with lower inflation rates. This means that the currency of the high-inflation country will have reduced purchasing power compared to other currencies, leading to depreciation.

If Purchasing Power Parity Is Holding, What Will Happen to the Currency