If a currency has appreciated more than the price differential between two countries as implied by PPP,then a currency is overvalued.

Question

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PPP (Purchasing Power Parity) theory suggests that exchange rates between countries should naturally adjust to reflect the price levels of goods and services in each country. If a currency appreciates more than the price differential implied by PPP, this means the currency has become more expensive relative to the other country's currency. Thus, the currency is overvalued.

If a Currency Has Appreciated More Than the Price Differential