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    Purchasing Power Parity and Inflation

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    the increase in the money supply as being analogous to giving people more money. If the output of goods and services is not growing at a similar rate, inflation will eventually occur. According to PPP Theory, what will happen to the U.S. dollar? Why?

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    When inflation occurs the value of the home currency will be at a disadvantage and hence this currency will have a low purchasing power. So according to the purchasing power parity (PPP), currency exchange rates between two countries should be equal to the aggregate levels of prices that are exhibited by the two countries . The PPP theory ...

    Solution Summary

    The effects of inflation on a country's purchasing power and currency value.

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