Suppose the current spot exchange rate for the Chinese yuan is USD 0.15 per CNY. If the domestic prices of traded goods rise 70% over the next 10 years in China and 20% over the same period in the United States, then, according to the relative purchasing power parity hypothesis, the spot exchange rate for the yuan in 10 years will be approximately:
Suppose the current spot exchange rate for the Chinese yuan is USD 0.15 per CNY. If the domestic prices of traded goods rise 70% over the next 10 years in China and 20% over the same period in the United States, then, according to the relative
According to the relative purchasing power parity (PPP) hypothesis, the exchange rate between two currencies should adjust to reflect the changes in the relative prices of goods and services in the two countries. In other words, if the domestic prices of traded goods increase more rapidly in one country than in another, the currency of the country with the higher inflation rate should depreciate relative to the other currency.
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