Skip to content

ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

A company expects a currency's real value to be stable. Which factor would most directly cause the expected spot rate of the home currency to depreciate under the purchasing power parity theory?

Home inflation rising above foreign inflation causes home currency depreciation under purchasing power parity. Goods become relatively more expensive at home, so the exchange rate must adjust to restore equal prices. Higher foreign inflation would have the opposite effect.

  1. AHome inflation rising above foreign inflationCorrect
  2. BHome interest rates falling below foreign rates with inflation equal
  3. CA rise in foreign inflation above home inflation
  4. DA government surplus in the home country

Explanation

PPP implies the currency of the country with higher inflation depreciates, to keep prices equal across countries. Higher foreign inflation would cause appreciation of the home currency instead.

Did you get it right without looking?

One question tells you little. A timed set on Management of international trade and finance shows your real accuracy, how long you take and where you lose marks.

Practise Management of international trade and financeFree diagnostic mock

More Management of international trade and finance questions