Suppose the current exchange rate between the U.S.dollar and the Mexican peso is $0.12 = 1 peso.Furthermore,suppose the price level in Mexico rises 25 percent while the U.S.price level remains constant.According to the purchasing power parity theory,what will be the equilibrium exchange rate?

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Purchasing Power Parity (PPP) suggests that exchange rates will adjust to equalize the price of goods across countries. If the price level in Mexico rises by 25%, the value of the peso in terms of dollars should decrease to maintain purchasing power parity. The original exchange rate is $0.12 = 1 peso. After a 25% increase in the price level in Mexico, 1 peso buys 25% less in terms of goods, so the new exchange rate should reflect this devaluation. $0.12 / 1.25 = $0.096, making the new exchange rate $0.096 = 1 peso.

Suppose the Current Exchange Rate Between the U