Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:
A. the dollar to appreciate 5% relative to the peso.
B. the peso to appreciate 5% relative to the dollar.
C. the real exchange rate of U.S. goods / Mexican goods to appreciate 5%.
D. the nominal exchange rate to stay fixed.
Answer: A
Economics
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