If purchasing-power parity holds but then U.S.prices rise,which of the following move the exchange rate back towards purchasing-power parity?
A)foreign prices rise or the U.S.nominal exchange rate rises
B)foreign prices rise or the U.S.nominal exchange rate falls
C)foreign prices fall or the U.S.nominal exchange rate rises
D)foreign prices fall or the U.S.nominal exchange rate falls

Question

Quizplus · Accepted Answer

If U.S. prices rise, for purchasing-power parity to hold, either foreign prices must rise to match the increase, or the U.S. nominal exchange rate must fall to make U.S. goods cheaper in foreign currency terms.

If Purchasing-Power Parity Holds but Then U