Trade & Open Economy · intermediate
What moves on the Purchasing Power Parity diagram
Higher foreign prices flatten e = P/P*: the home currency appreciates in relative-PPP terms.
Start on the PPP line.
Now inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. strikes ABROAD. P* rises, flattening the line.
Your currency buys more of theirs: appreciation without you doing anything. Exchange rates grade countries on a curve.
Examiners ask this as: foreign inflation appreciation, trading partner prices.
Other scenarios on Purchasing Power Parity