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Q. Explain Purchasing Power Parity.
Answer: PPP () states that the exchange rate between two countries' currencies equals the ratio of the countries' price levels.
A decrease in a currency's domestic purchasing power that is an increase in the domestic price level will be associated with proportional currency depreciation in the foreign exchange market and vice versa.
E$/E = PUS/PE where P is the price of the reference commodity basket Rearrange: PUS = (E$/E) x (PE)
Therefore, Purchasing Power Parity (PPP) asserts that all countries' price levels are equal when measured in terms of the same currency.
Q. What will be the effects of an increase in the money supply on the interest rate? Answer: An enhance in the money supply will origins the interest rate to decrease. This m
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