Question

g If the 2015 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2015, the value of the British pound in terms of U.S. dollars will A. fall by 2 percent. B. rise by 2 percent C. rise by 10 percent. D. fall by 10 percent.

Answer 1

A. fall by 2 percent.

Step-by-step explanation:

As the British pound lost 2 percent in purchasing power more than the U.S. dollars and according to the theory of purchasing power parity, exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries, the British pound in terms of U.S. dollars will fall by 2 percent, in order to return to equilibrium.