Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S. currency must rise if the price levels in
A)foreign countries rise.
B)the United States rises.
C)both countries rise.
D)both countries fall.

Question

Quizplus · Accepted Answer

Purchasing-power parity states that the exchange rate between two currencies should eventually equalize the prices of a basket of goods and services across countries. Therefore, if the price level in a foreign country rises compared to the United States, the foreign currency must increase in value (and the nominal exchange rate must rise) to maintain purchasing power parity.

Purchasing-Power Parity Implies That the Nominal Exchange Rate Given as Foreign