The law of one price 6. Purchasing power parity The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two countries adjusts so that the price of an identical good is the same when expressed in the same currency A television sells for $889.35 in the United States. The exchange rate between the U.S. dollar and the Swiss franc (SFr) is $0.8145 per Swiss franc. Assuming that PPP holds true, how much does the same television cost in Switzerland? O SFr 1,146.50 O SFr 1,091.90 SFr 928.12 SFr 1,255.69 Suppose the price of the television in Switzerland was actually SFr 873.52. Assuming no transaction costs transportation costs, or import restrictions, PPP predicts that the demand would in Switzerland decrease increase 7. Inflation, interest rates, and exchange rates Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies Consider the following statement: Countries with lower inflation rates will have lower interest rates Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid O The statement is valid, because the nominal interest rate is the sum of the real interest rate plus inflation, so lower inflation rates would result in lower interest rates O The statement is invalid, because the nominal interest rate is independent of the inflation rate If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be by the losses from currency appreciation offset multiplied The currency of a country with a higher inflation rate than Japan's inflation rate will the yen over time against depreciate appreciate