Considering the Theory of Purchasing Power Parity, If Inflation in Mexico

question 92

Multiple Choice

Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:

• A) the dollar to appreciate 5% relative to the peso.
• B) the peso to appreciate 5% relative to the dollar.
• C) the nominal exchange rate to stay fixed.
• D) the real exchange rate of U.S. goods / Mexican goods to appreciate 5%.

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