If inflation in country A exceeds inflation in country B, purchasing power parity implies that:

Question

Quizplus · Accepted Answer

Purchasing power parity suggests that in the long run, the exchange rate between two currencies should adjust to reflect the difference in inflation rates. If inflation in country A exceeds inflation in country B, goods in country A will become more expensive compared to country B. This will cause a decrease in demand for goods in country A, causing the value of the currency in country A to decrease compared to country B. Therefore, the currency of country A will depreciate relative to country B.

If Inflation in Country a Exceeds Inflation in Country B