Question

Deflation power parity is a situation in which goods cost the same in one country as in another when prices are compared using the market exchange rate.

Group of answer choices

True

False

2.

Foreign exchange rates for the U.S. dollar change constantly as supply and demand conditions change.

Group of answer choices

True

False

3.

According to purchasing power parity, when should a nation's currency appreciate?

Group of answer choices

When it experiences lower inflation than its trading partners

When it experiences greater inflation than its trading partners

When its interest rates are expected to decrease

When it does not produce products that are traded in international markets

4.

If exchange rates and prices in other countries remain constant, then an increase in the U.S. price level will tend to increase U.S. exports.

Group of answer choices

True

False

Answer 1

1. The given statement is false as deflation causes gain in purchasing power of a country in comparison to other.

2. Foreign exchange rates changes with the shift in demand and supply curves. Thus, the given statement is correct.

3. Lower inflation leads to appreciation of currency. Thus, option a is correct. Options b is incorrect because higher inflation leads to depreciation of the currency. Again, option c is incorrect because lower interest rates leads to higher inflation and thereby, depreciation of the currency. Option d is incorrect because lack of production leads to depreciation of the currency. Thus, only option a is the correct answer.

4. If exchange rates and prices in other countries remain constant, then, an increase in the U.S. price level will tend to decrease U.S. exports. Thus, the given statement is incorrect.