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Chapter 8

Q. 8.ST.3

Use PPP to explain how the values of the currencies of Eastern European countries might change if those countries experience high inflation, while the United States experiences low inflation.

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Verified Solution

High inflation will cause a balance-of-trade adjustment, whereby the United States will reduce its purchases of goods in these countries, while the demand for U.S. goods by these countries should increase (according to PPP). Consequently, there will be downward pressure on the values of these currencies.