Final answer:
A country's currency that is stronger than what is justified by inflation rate differences is overvalued in terms of PPP. High inflation rates tend to decrease currency demand and lead to depreciation. Thus, a country with hyperinflation is less likely to have a PPP-equivalent exchange rate than a country with low inflation.
Step-by-step explanation:
A country's currency that has strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be overvalued in terms of Purchasing Power Parity (PPP). In the context of PPP, if a currency is stronger than the inflation rates would suggest, it buys more foreign goods than it should, indicating that it is overvalued. This condition is opposite to being undervalued, where a currency would buy less than what the inflation rates imply.
When discussing PPP, it is particularly relevant to consider the effect of inflation on exchange rates. In the medium run of a few months or a few years, inflation rates influence exchange rate markets. Countries with high inflation typically see lower demand for their currency, leading to currency depreciation. Conversely, countries with low inflation may see their currency appreciate. Over time, exchange rates generally adjust to the PPP rate, equalizing the prices of goods across different economies when converted to a common currency at the PPP exchange rate.
Therefore, a country experiencing hyperinflation is less likely to have an exchange rate that is equal to its PPP value compared to a country with a low inflation rate. Hyperinflation leads to a rapid decrease in demand for the currency, causing it to depreciate more quickly than the exchange rate can adjust to the PPP value.