U.S. prices rise 4 percent

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Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, which of the following should happen?

A. The dollar will depreciate
B. The peso will be worth 1.5 dollars in the foreign exchange market
C. The peso will depreciate
D. The dollar will be worth 1.5 pesos in the foreign exchange market

    • 12 years ago
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