Suppose that exchange rate between the dollar and the peso is in equilibrium when inflation in the U.S. rises to 8.50%. At the same time, inflation in Mexico is 4.00%.
If the inflation rate in the U.S. is denoted as IhIh and the inflation rate in Mexico is IfIf, then which of the following expressions represents the percent change in the peso under PPP?
1+If1+Ih−11+If1+Ih−1
1+If1+Ih+11+If1+Ih+1
1+Ih1+If+11+Ih1+If+1
1+Ih1+If−11+Ih1+If−1
According to this formula, percentage change in the peso should be under PPP.