Which of the following does purchasing-power parity imply?
A)the foreign price level times the nominal exchange rate (given as amount of foreign currency per dollar)equals the U.S.price level.
B)The price of domestic goods relative to foreign goods cannot change.
C)The nominal exchange rate is the ratio of foreign prices to U.S.prices.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

Purchasing-power parity implies that the foreign price level times the nominal exchange rate (given as the amount of foreign currency per dollar) is equal to the U.S. price level. This means that the prices of goods in different countries should adjust over time to reflect changes in exchange rates. Option B is incorrect as PPP does not imply that the domestic prices cannot change relative to foreign prices. Option C is incorrect as the nominal exchange rate is the rate at which one country's currency can be exchanged for another country's currency.

Which of the Following Does Purchasing-Power Parity Imply