If U.S. inflation is 2%, Japanese inflation is 1%, and Mexican inflation is 3%, which of the following is true according to the theory of purchasing power parity?

Question

Quizplus · Accepted Answer

According to purchasing power parity, the currency of a country with higher inflation should depreciate relative to the currency of a country with lower inflation. Since U.S. inflation is higher than Japanese inflation, the dollar should depreciate by 1% against the yen. Since U.S. inflation is lower than Mexican inflation, the dollar should appreciate by 1% against the peso.

If US Inflation Is 2%, Japanese Inflation Is 1%, and Mexican