Question

The U.S. has expected inflation of 2%, while Country A, Country B, and Country C have expected inflation of 7%. Country A engages in much international trade with the U.S. The products that are traded between Country A and the U.S. can easily be produced by either country. Country B engages in much international trade with the U.S. The products that are traded between Country B and the U.S. are important health products, and there are not substitutes for these products that are exported from the U.S. to Country B or from Country B to the U.S. Country C engages in much international financial flows with the U.S. but very little trade. If you were to use purchasing power parity (PPP) to predict the future exchange rate over the next year for the local currency of each country against the dollar, PPP would provide the most accurate forecast for the currency of: _________

Answer 1

If you were to use purchasing power parity (PPP) to predict the future exchange rate over the next year for the local currency of each country against the dollar, PPP would provide the most accurate forecast for the currency of: _________

Country A.

Step-by-step explanation:

The U.S. and Country A have Purchasing Power Parity (PPP) if an exchange rate can be determined between these two countries' currencies when their purchasing power is in equilibrium. This parity can only be established by comparing a basket of goods in the two countries. This basket of goods is not possible to compare with Country B or Country C that has no similar goods with the U.S.