If the inflation differential between Mexico and the U.S. is greater than the percentage change in the peso/dollar exchange rate then purchasing power parity holds.

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) holds when the percentage change in the exchange rate between two currencies over a period is equal to the difference in inflation rates between the two countries. If the inflation differential is greater than the change in exchange rate, it indicates a deviation from PPP.

If the Inflation Differential Between Mexico and the U