In the long run,if purchasing power parity (PPP)is maintained,a rise in a country's price level (relative to the foreign price level)should cause its currency to _______,while a fall in the country's relative price should cause its currency to _______.

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity (PPP), in the long run, a rise in a country's price level relative to the foreign price level should cause its currency to depreciate. This is because the goods in the country would become relatively more expensive than the foreign goods, making them less attractive to foreign buyers, leading to a decrease in demand for the country's currency. Conversely, a fall in the country's relative price should cause its currency to appreciate. This is because the goods in the country would become relatively less expensive compared to foreign goods, making them more attractive to foreign buyers, leading to an increase in demand for the country's currency. Therefore, the best choice is C, i.e., depreciate; appreciate.

In the Long Run,if Purchasing Power Parity (PPP)is Maintained,a Rise