The relative purchasing power-parity theory postulates that:
A)The equilibrium exchange rate is equal to the ratio of the price level in the two nations
B)the change in the exchange rate over a period of time should be proportional to the relative change in the price level in the two nations over the same time period
C)the change in the exchange rate over a period of time should be proportional to the absolute change in the price level in the two nations over the same time period
D)the exchange rate at a period of time should be proportional to the relative prices in

Question

Quizplus · Accepted Answer

The relative purchasing power-parity theory states that the change in the exchange rate between two nations over a period of time should be proportional to the relative change in the price level in the two nations over the same time period. This means that if one country experiences a higher inflation rate than the other, its currency should depreciate accordingly to maintain the relative value of its goods and services compared to the other country. However, this theory is not always accurate in practice due to factors such as trade barriers and market inefficiencies.

The Relative Purchasing Power-Parity Theory Postulates That