Suppose the current exchange rate between the U.S.dollar and the Mexican peso is $0.10 = 1 peso.Furthermore,suppose the price level in Mexico rises 15 percent while the U.S.price level remains constant.According to the purchasing power parity theory,which of the following exchange rates comes closest to being the equilibrium exchange rate?

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, if the price level in Mexico rises by 15%, the peso should depreciate by 15% relative to the dollar. The initial exchange rate is $0.10 = 1 peso. A 15% depreciation would result in an exchange rate of $0.085 = 1 peso (0.10 * (1 - 0.15) = 0.085).

Suppose the Current Exchange Rate Between the U