According to purchasing-power parity what should the nominal exchange rate between the U.S.and another country be equal to?
A)1
B)the real exchange rate between the U.S.and that country
C)the price level in the U.S.divided by the price level in the other country
D)the price level in the other country divided by the price level in the U.S.

Question

Quizplus · Accepted Answer

According to purchasing-power parity, the nominal exchange rate between the U.S. and another country should equal the ratio of the price level in the other country divided by the price level in the U.S. This is because under PPP, the exchange rate should adjust so that identical goods have the same price in both countries when measured in the same currency. Therefore, option D, which states that the nominal exchange rate should be equal to the price level in the other country divided by the price level in the U.S., is the correct answer.

According to Purchasing-Power Parity What Should the Nominal Exchange Rate