The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

Question

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According to the Purchasing Power Parity (PPP) theory, a country's exchange rate should adjust to reflect changes in the price levels between countries. Therefore, a country with a higher inflation rate will have a decrease in the purchasing power of its currency, which leads to the depreciation of its exchange rate.

The PPP Theory Tells Us That a Country with a High