13. According to the theory of purchasing power parity, a rate of inflation that

Question

13. According to the theory of purchasing power parity, a rate of inflation that was persistently higher in Australia than in the United States is likely to lead to a. an appreciation of the Australian dollar relative to the United States dollar. b. an increase in the rate of interest in Australia relative to the rate of interest in the United States. c. a decrease in the rate of interest in Australia relative to the rate of interest in the United States. d. depreciation of the Australian dollar relative to the United States dollar.

Explanation / Answer

Ans) d is the correct option. Depreciation of the Australian dollar relative to the United States dollar. When inflation rate is higher in Australia then the Australian dollar will devalue because now the Australian goods become less competitive

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