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Assume a country where the inflation rate is 3%, while the foreign inflation rate is 2%. The domestic currency is expeted to depreciate by 2%.

Assume a country where the inflation rate is 3%, while the foreign inflation rate is 2%. The domestic currency is expeted to depreciate by 2%. Does the purchasing power parity hold in this case? If not, what is expected to happen? What mechnasims will unfold and what will happen to the prices/inflation rates and the actual/current exchange rate?

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