According to the Theory of 'Purchasing Power Parity', the Foreign

question 18

Multiple Choice

According to the theory of 'purchasing power parity', the foreign exchange market will:

• A)no longer demand Australian dollars if the inflation rate in Australia is higher than the inflation rates in other countries.
• B)undervalue the Australian dollar if inflation in Australia is higher than the inflation rates in other countries.
• C)adjust the value of currencies to reflect differing inflation rates between countries.
• D)result in an increase in the supply of dollars whenever Australia's inflation rate is lower than the inflation rates in other countries.

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