During 2011,the price level in the U.S.rose at a faster rate than the price level in Japan.Other things the same,according to purchasing-power parity,this difference in inflation rates should have caused
A)the nominal exchange rate of the dollar to appreciate relative to the yen.
B)the real exchange rate of the dollar to appreciate relative to the yen.
C)the nominal exchange rate of the dollar to depreciate relative to the yen.
D)the real exchange rate of the dollar to depreciate relative to the yen.

Question

Quizplus · Accepted Answer

According to the purchasing-power parity theory, inflation rates affect exchange rates. When the price level increases, the currency of the country with higher inflation becomes less valuable, causing the nominal exchange rate to depreciate. Therefore, the nominal exchange rate of the dollar should depreciate relative to the yen in this scenario.

During 2011,the Price Level in the U