Question

According to purchasing-power parity, if it took 58 Indian rupees to buy a dollar today, but it took 55 to buy it a year ago, then the dollar has

A. depreciated, indicating inflation was higher in the U.S. than in India.
B. depreciated, indicating inflation was lower in the U.S. than in India.
C. appreciated, indicating inflation was higher in the U.S. than in India.
D. appreciated, indicating inflation was lower in the U.S. than in India.

Answer 1

According to purchasing-power parity, if it took more Indian rupees to buy a dollar today compared to a year ago, then the dollar has appreciated, indicating lower inflation in the U.S. than in India.

Step-by-step explanation:

According to the concept of purchasing-power parity, if it took 58 Indian rupees to buy a dollar today, but it took 55 rupees to buy it a year ago, then the dollar has appreciated. This indicates that inflation was lower in the U.S. than in India. When the purchasing power of a currency increases, it means that it can buy more goods or services, which suggests a lower inflation rate.

Answer 2

The dollar has appreciated against the Indian rupee, indicating that inflation rates were lower in the U.S. than in India. Thus, option D is the correct answer to the student's question regarding purchasing-power parity and the change in exchange rates.

Step-by-step explanation:

The question relates to the concept of purchasing-power parity (PPP), which is a theory in economics that suggests that in the long run, exchange rates should adjust so that an identical good in two different countries will have the same price when expressed in a common currency. According to PPP, if it now costs more Indian rupees to buy the same dollar than a year ago, then the Indian rupee has weakened in buying power relative to the dollar, meaning the dollar has appreciated.

When considering inflation, if the dollar appreciates versus the rupee, it means inflation was lower in the U.S. compared to India. Higher inflation reduces the buying power of a currency. Consequently, the correct answer is that the dollar has appreciated, indicating inflation was lower in the U.S. than in India. Therefore, option D is correct.