Answer (D) is correct . Inflation in the U.S. means that $1.03 now has the purchasing power formerly enjoyed by $1.00. The 12% depreciation of the ptoma means that its purchasing power in dollars has declined to 88%. Dividing the U.S. inflation factor of 1.03 by the new ptoma value of .88 and subtracting 1 results in a net loss of ptoma purchasing power against the dollar of 17.05%.
Answer (A) is incorrect because Prices paid by the Ptomanian buyer will increase. It must adjust payments in ptomas upward for both U.S. inflation and Ptomanian monetary depreciation.
Answer (B) is incorrect because Prices paid by the Ptomanian buyer will increase. It must adjust payments in ptomas upward for both U.S. inflation and Ptomanian monetary depreciation.
Answer (C) is incorrect because Prices will increase by 3% simply as a result of inflation. This answer disregards the effect of the currency depreciation.
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