Question

According to purchasing power parity, if the Federal Reserve increased the money supply leading to higher U.S. inflation, then
(a) U.S. prices would rise and the nominal exchange rate would rise.
(b) U.S. prices would rise and the nominal exchange rate would fall.
(c) U.S. prices would fall and the nominal exchange rate would rise.
(d) U.S. prices and the nominal exchange rate would fall.

Answer 1

Answer:

b. U.S. prices would rise and the nominal exchange rate would fall.

Explanation:

The increased inflation increases the US prices and the exchange rate falls because import from US decreases and the US start importing more so the value of dollar decreases.