If purchasing power parity holds,then if the price of a basket of goods in the U.S.rose from $1,500 to $2,000 and the price of the same basket in Mexico rose from 12,000 pesos to 18,000 pesos
A)inflation was higher in the U.S.than Mexico so the U.S.dollar would appreciate.
B)inflation was higher in the U.S.than Mexico so the U.S.dollar would depreciate.
C)inflation was lower in the U.S.than Mexico so the U.S.dollar would appreciate.
D)inflation was lower in the U.S.than Mexico so the U.S dollar would depreciate.

Question

Quizplus · Accepted Answer

The U.S. inflation rate is 33.33% (from $1,500 to $2,000), while Mexico's inflation rate is 50% (from 12,000 to 18,000 pesos). Since inflation is lower in the U.S., the U.S. dollar would appreciate relative to the Mexican peso.

If Purchasing Power Parity Holds,then If the Price of a Basket