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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

The theory of purchasing-power parity says that higher inflation in a nation causes the nation’s currency to _______, leaving the _______ exchange rate unchanged.

a. appreciate, nominal

b. appreciate, real

c. depreciate, nominal

d. depreciate, real

To determine

Changes in currency value.

Explanation

Option (d):

The theory of purchasing-power parity says that higher inflation in a nation causes the nation's currency to depreciate leaving the real exchange rate. When a nation experience inflation, the monitory authority depreciate the nation’s currency. Thus, option “d” is correct.

Option (a):

When inflation occurs, the money supply will increase. At the time of inflation, the currency value is reduced that means it is depreciated leaving the real exchange rate and not the nominal exchange rate. Thus, option “a” is incorrect...

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