If over the next few years inflation is higher in Mexico than in the U.S. ,then according to purchasing-power parity which of the following should rise?
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.real exchange rate but not the U.S.nominal exchange rate.
D)neither the U.S.real nor the U.S.nominal exchange rate.

Question

Quizplus · Accepted Answer

According to purchasing-power parity, if inflation is higher in Mexico than in the U.S., the U.S. nominal exchange rate should rise to offset the inflation differential, keeping the real exchange rate constant.

If Over the Next Few Years Inflation Is Higher in Mexico