Exchange rates fluctuations a. tend to correct balance of payments imbalances. The monetary approach to the exchange rate predicts that the domestic currency appreciates as a response to a. a decrease in the domestic money supply. French franc per U.S. dollar. We can expect deviations from PPP because of a. tariffs and quotas. German cars sold in the United States become more expensive.
American cars sold in Germany become less expensive.
American wheat sold in Germany becomes more expensive. American wheat sold in Germany becomes less expensive. If the dollar appreciates against the German mark at a faster rate than the German inflation rate exceeds the U.S. rate, then the dollar appears a. depreciated. The more homogeneous goods are, the more we expect the law of one price not to hold. If absolute PPP holds, then relative PPP will also hold.