Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan.According to the purchasing-power parity theory,the dollar would be expected to:

Question

Quizplus · Accepted Answer

The purchasing-power parity theory suggests that exchange rates between two countries should adjust to reflect differences in inflation rates. In this case, since the US has a higher inflation rate than Japan, the US dollar will depreciate relative to the Japanese yen. Therefore, the correct answer is B- Depreciate by 8 percent against the yen.

Assume That the United States Faces an 8 Percent Inflation