Given the combination of purchasing power parity (PPP) with quantity theory equations, which of the following statements is true?
A. As long as the money supplies in the two countries are the same, the exchange rate will be equal to one.
B. Everything else remaining unchanged, the price of the foreign currency (e) would be reduced by an increase in the relative size of the money supply in the domestic economy.
C. Everything else remaining unchanged, the price of the foreign currency (e) would be raised by an increase in the relative size of foreign production.
D. The exchange rate would remain unaffected as long as the relative growth in productivity between the two nations remains constant, even if the relative money supply varies between the two economies.
Answer: C
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