Suppose inflation is higher in the United States over the next six months than in foreign countries. If exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods U.S. goods buy, then according to purchasing-power parity we should expect to see
A)only the nominal exchange rate depreciate.
B)both the real and nominal exchange rate appreciate.
C)both the real and nominal exchange rate depreciate.
D)only the real exchange rate appreciate.

Question

Quizplus · Accepted Answer

According to purchasing-power parity, if inflation is higher in the United States than in foreign countries, then the dollar should depreciate in value relative to foreign currencies. This is because the higher inflation in the United States will make US goods and services more expensive relative to foreign goods and services, which will reduce the demand for US dollars and cause the dollar to depreciate.

Suppose Inflation Is Higher in the United States Over the Next