Which of the following is a statement of the purchasing power parity theory of exchange rate determination? The exchange rate will adjust in the
A) long run until the interest rate is roughly the same in both countries.
B) long run until real GDP is roughly the same in both countries.
C) long run until the average price of goods is roughly the same in both countries.
D) short run until the average price of goods is roughly the same in both countries.

Question

Quizplus · Accepted Answer

The purchasing power parity theory of exchange rate determination states that in the long run, the exchange rate will adjust until the average price of goods is roughly the same in both countries. This means that a currency will appreciate or depreciate to reflect differences in the inflation rates across countries.

Which of the Following Is a Statement of the Purchasing