Question

If the 2018 inflation rate in Eurozone is 1.8 percent, and the inflation rate in UK is 2.1 percent, then the theory of purchasing power parity predicts that, during 2018, the value of euro in terms of pounds will Group of answer choices

Answer 1

The value of Euro in terms of pound will Appreciate

The PPP studies the economies on the basis of cost of living. That means if Economy A has higher inflation than Economy B, then goods and services are expensive in Economy A. On the basis of this we can find out that the Exchange rate of Economy A will depreciate against B and Economy B currency will appreciate. Purchasing Power Parity suggests that countries with higher rates of inflation will have a devalued currency