For purchasing-power parity to exist,
A) flows of currency in the trade account must be offset by flows of currency in the capital account.
B) the nominal interest rate must be equal to the real interest rate in all countries.
C) converting a sum of funds from one currency to another does not alter its purchasing power.
D) a country's trade account must always be in balance.

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) is the theory that exchange rates should adjust so that the same basket of goods has the same price across countries. This means that converting a sum of funds from one currency to another should not alter its purchasing power. Therefore, choice C is the correct answer. Choices A, B, and D are not directly related to PPP.

For Purchasing-Power Parity to Exist