According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Japan,then which of the following falls?
A)the U.S.real exchange rate,but not the U.S.nominal exchange rate
B)the U.S.nominal exchange rate,but not the U.S.real exchange rate
C)the U.S.nominal exchange rate and the U.S.real exchange rate
D)neither the real exchange rate nor the nominal exchange rate

Question

Quizplus · Accepted Answer

According to the purchasing power parity (PPP) theory, the nominal exchange rate adjusts to equalize the prices of identical goods and services in two different countries. If the price level in the US rises more than in Japan, it means that the US dollar's purchasing power has decreased relative to that of the Japanese yen. Therefore, the US must allow its nominal exchange rate to decrease (i.e., depreciate) to restore the PPP equilibrium. The US real exchange rate, which accounts for changes in the relative inflation rates, will also fall because of the change in the nominal exchange rate, assuming Japan has a lower inflation rate than the US.

According to Purchasing-Power Parity,if Over the Course of a Year