If the U.S.price level is increasing by 3 percent annually and the Swiss price level is increasing by 2 percent annually,by about what percent would the price of Swiss francs in dollars need to change according to purchasing power parity?
A) decrease by 5 percent
B) decrease by 1 percent
C) increase by 5 percent
D) increase by 1 percent

Question

Quizplus · Accepted Answer

According to purchasing power parity (PPP), the change in exchange rate between two currencies should reflect the change in their respective price levels. In this case, the U.S. price level is increasing by 3% annually and the Swiss price level is increasing by 2% annually. Therefore, the Swiss franc should appreciate (decrease in price relative to the dollar) in order to reflect the lower rate of inflation. To calculate the approximate percentage change in the exchange rate, we can take the difference in the inflation rates (3% - 2% = 1%) and estimate that the Swiss franc would need to depreciate by this amount. So the answer is choice B, decrease by 1 percent.

If the USprice Level Is Increasing by 3 Percent Annually and the and the Swiss