According to the theory of purchasing power parity (PPP), if inflation in one country increases relative to another, what adjustment is expected to occur in the foreign exchange market to maintain equivalent purchasing power?

Question

Answer

The currency of the high-inflation country will depreciate relative to the low-inflation country.

Answer

Central banks in both countries will adjust interest rates to equalize inflation rates.

Answer

The currency of the low-inflation country will appreciate to reduce export competitiveness.

Answer

The real exchange rate will remain unchanged while nominal prices adjust over time.

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According to the theory of purchasing power parity (PPP), if inflation in one co...

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