Can someone explain this or is the answer key incorrect? In a table, we’re given China’s 2011 inflation rate of 4.1%. The question is:
If the inflation rate in the U.S. at the end of 2011 was 3.5%, using relative purchasing power parity, the approximate change in China’s exchange rate is closest to:
A. 0.6%
B. 0.2%
C. -0.6%
The answer key says it’s A, listing the inflation differential as: I(FC) - I(DC) = 4.1% - 3.5% = 0.6%. Shouldn’t the answer, however, be C? China has higher inflation, which would indicate less purchasing power and a decline in the exchange rate.
Any help would be greatly appreciated. Good luck, everyone!