Based on the purchasing power parity theory, in the long run, currencies of countries with significant inflation will tend to:
A) be flexible.
B) have nominal exchange rates.
C) depreciate.
D) appreciate.

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, currencies of countries with significant inflation tend to depreciate in the long run as the inflation erodes their purchasing power. This means that the same amount of currency can only buy a smaller amount of goods and services over time, making the currency less valuable in the global market. Therefore, the correct choice is C, which represents currency depreciation.

Based on the Purchasing Power Parity Theory, in the Long