Question

Suppose the rate of inflation was 2 percent in India from 2008-2012 and, over that same period, the inflation rate in the United States was 2.7 percent. Based on these inflation trends, which of the following is true?

a. The PPP condition implies that the rupee has depreciated relative to the dollar.
b. The PPP condition implies that the rupee has appreciated relative to the dollar

Answer 1

b. The PPP condition implies that the rupee has appreciated relative to the dollar

Step-by-step explanation:

Remember, the inflation rate looks at how the prices of goods and services in a country increases over a period of time, and it's effects on the the purchasing value or power of money in the country.

As in this scenario, India had 2 percent inflation rate while United States had 2.7 which is a higher price increases not in a different period but the same one, meaning that the Purchasing power parity (PPP) condition of the rupee has appreciated relative to the dollar from 2008-2012.