If absolute purchasing power parity holds, then:
A) relative PPP will hold.
B) relative PPP will not hold.
C) the nominal exchange rate is not equal to the ratio of the price indexes between the two countries.
D) the nominal exchange rate is undervalued.
E) the nominal exchange rate is overvalued.

Question

Quizplus · Accepted Answer

Absolute purchasing power parity implies that the price levels between two countries are equal when expressed in a common currency, which inherently suggests that relative PPP, which deals with the rate of change in prices between two countries, will also hold.

If Absolute Purchasing Power Parity Holds, Then