According to purchasing-power parity,if the Federal Reserve increased the money supply
A)U.S.prices would rise and the nominal exchange rate would rise.
B)U.S.prices would rise and the nominal exchange rate would fall.
C)U.S.prices would fall and the nominal exchange rate would rise.
D)U.S.prices and the nominal exchange rate would fall.

Question

Quizplus · Accepted Answer

According to purchasing-power parity, an increase in the money supply would cause inflation, which would lead to higher prices in the U.S. economy. This would make U.S. goods relatively more expensive compared to goods from other countries, leading to a fall in the nominal exchange rate. Therefore, U.S. prices would rise and the nominal exchange rate would fall.

According to Purchasing-Power Parity,if the Federal Reserve Increased the Money