Question2 If Australia’s inflation = 3% and US inflation = 6%, then under relative PPP, the AUD should: Select one alternative: A) Appreciate ≈ 3% B) Depreciate ≈ 3% C) Appreciate ≈ 6% D) Remain unchanged ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

First, restating the problem helps set the context: If Australia’s inflation is 3% and the US inflation is 6%, then under relative purchasing power parity (PPP), the exchange rate between AUD and USD should adjust by the inflation differential.
Option A: 'Appreciate ≈ 3%.' This aligns with relative PPP, which states that if a country experiences lower inflation relative to another, its currency should appreciate by roughly the difference in inflation rates. Since US inflation is higher by 3 percentage points, the AUD is expected to strengthen against the USD by about 3%. This is a correct interpretation.
Option B: 'Depreciate ≈ 3%.’ This would imply the currency with lower inflation (AUD) would weaken by 3%, which contradicts the relative PPP implication. If the foreign country has higher inflation, its currency should lose value relative to the lower-inflation country, not the other way around.
Option C: 'Appreciate ≈ 6%.' This reflects the full US inflation rate rather than the differential. Relative PPP cares about the difference between the two inflation rates, not the entire rate of the other country, so 6% is too large and incorrect.
Option D: 'Remain unchanged.' Relative PPP generally predicts a move corresponding to the inflation differential unless there are offsetting factors; with a 3% differential, assuming other factors neutral, the exchange rate should adjust, so 'remains unchanged' is unlikely and not consistent with the PPP rule.
In summary, the key idea is that the exchange rate shift equals (inflation_US − inflation_Australia) when measuring how the AUD/USD rate should adjust; here that difference is 3%, indicating the AUD should appreciate by about 3% relative to the USD. The other options misstate the direction or the magnitude of the adjustment that PPP predicts.

Question2 If Australia’s inflation = 3% and US inflation = 6%, then under relative PPP, the AUD should: Select one alternative: A) Appreciate ≈ 3% B) Depreciate ≈ 3% C) Appreciate ≈ 6% D) Remain unchanged ResetMaximum marks: 1 Flag question undefined

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