Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that
A) the Turkish currency will depreciate.
B) the dollar will depreciate.
C) it is impossible for interest rate parity to hold.
D) the Turkish currency will appreciate.

Question

Quizplus · Accepted Answer

The Turkish currency will depreciate relative to the dollar because higher inflation in Turkey compared to the U.S. reduces the purchasing power of the Turkish currency, making it less valuable compared to the dollar.

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