If purchasing-power parity holds,when a country's central bank decreases the money supply,its
A)price level rises and its currency appreciates relative to other currencies in the world.
B)price level falls and its currency appreciates relative to other currencies in the world.
C)price level rises and its currency depreciates 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 the purchasing-power parity theory, a decrease in a country's money supply will result in a decrease in its price level. As a result, its currency will appreciate relative to other currencies in the world because it will be able to purchase more with its currency. Therefore, the correct answer is that the country's price level falls and its currency appreciates relative to other currencies in the world.

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