If purchasing-power parity holds,when a country's central bank increases the money supply,its
A)price level rises and its currency appreciates relative to other currencies in the world.
B)price level rises and its currency depreciates relative to other currencies in the world.
C)price level falls and its currency appreciates relative to other currencies in the world.
D)price level falls and its currency depreciates relative to other currencies in the world.

Question

Quizplus · Accepted Answer

According to purchasing-power parity, an increase in a country's money supply should lead to an increase in its price level. This would lead to a decrease in the value of its currency relative to other currencies in the world, as goods and services become more expensive in that country. Therefore, the correct choice is B, as the currency would depreciate relative to other currencies in the world.

If Purchasing-Power Parity Holds,when a Country's Central Bank Increases the Money