According to purchasing-power parity, inflation in the United States causes the dollar to
A)depreciate relative to all other currencies.
B)depreciate relative to currencies of countries that have lower inflation rates.
C)appreciate relative to all other countries.
D)appreciate relative to currencies of countries that have lower inflation rates.

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) suggests that in the long run, exchange rates will adjust so that the same basket of goods in two different countries will have the same price when measured in a common currency. Therefore, if the United States experiences higher inflation than other countries, the value of the dollar will depreciate relative to the currencies of those countries with lower inflation rates. This is because higher inflation in the U.S. means that the U.S. goods become relatively more expensive compared to goods in countries with lower inflation, leading to a depreciation of the dollar to restore the parity.

According to Purchasing-Power Parity, Inflation in the United States Causes