Suppose That the Inflation Rate Is Higher in Turkey Than

question 135

Multiple Choice

Suppose that the inflation rate is higher in Turkey than in the U.S. for the next six months. Then according to purchasing power parity, if exchange rates are given in terms of how many Turkish lira or how many Turkish goods a U.S. dollar buys,

• A)the nominal exchange rate rises but the real exchange rate does not.
• B)the nominal exchange rate does not rise, but the real exchange rate does.
• C)both the nominal and real exchange rates rise.
• D)neither the nominal nor the real exchange rate rises.

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Definitions:

Proportional Relationship

A relationship between two quantities in which they increase or decrease at the same rate, resulting in a constant ratio or fraction.

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