"If the inflation rate differs between two countries, the exchange rate will change in such a way as to maintain constant terms of trade." This statement describes
A)synchronization
B)sterilization
C)purchasing power parity
D)comparative advantage
E)exchange rate overshooting

Question

Quizplus · Accepted Answer

The statement is describing the concept of Purchasing Power Parity (PPP), which states that the exchange rate between two currencies should adjust to equalize the prices of a basket of goods and services in those two countries. In other words, if one country experiences higher inflation, its currency would depreciate relative to the currency of the country with lower inflation to maintain constant terms of trade. This is the basic idea behind PPP. Therefore, the best choice is C.

"If the Inflation Rate Differs Between Two Countries, the Exchange