If P = domestic prices,P* = foreign prices,and e is the nominal exchange rate,which of the following is implied by purchasing-power parity?
A)P = e/P*
B)1 = e/P*
C)e = P*/P
D)None of the above is correct.

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) states that the nominal exchange rate between two countries should equal the ratio of the price levels in the two countries. Therefore, e = P*/P, which is option C. Option A and B do not accurately reflect PPP.

If P = Domestic Prices,P* = Foreign Prices,and E Is