Which country is experiencing the higher rate of inflation

Reference no: EM13242181

Suppose P (domestic price) and P* (foreign price) are both increasing. Now suppose that the dollar experiences a 5% nominal depreciation.
a. Which country is experiencing the higher rate of inflation if the domestic currency experiences a real appreciation? Briefly explain.
b. Which country is experiencing the higher rate of inflation is the domestic currency experiences a real depreciation? Briefly explain.
c. Compare the changes in P and P* if the real exchange rate does not change.

Reference no: EM13242181

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