Assume that the U.S.has a 2 percent inflation rate while Sweden has a 7 percent inflation rate.According to relative PPP,the dollar would be expected to:
A) Appreciate by 3.5 percent against the Swedish krona.
B) Depreciate by 3.5 percent against the Swedish krona.
C) Appreciate by 5 percent against the Swedish krona.
D) Depreciate by 5 percent against the Swedish krona.

Question

Quizplus · Accepted Answer

According to the relative Purchasing Power Parity (PPP) theory, the currency of the country with a lower inflation rate (in this case, the U.S.) is expected to appreciate relative to the currency of the country with a higher inflation rate (Sweden). The expected appreciation rate is the difference in inflation rates, which is 7% (Sweden) - 2% (U.S.) = 5%.

Assume That the U