If the inflation differential between Germany and the United States is greater than the percentage change in the euro/dollar exchange rate then purchasing power parity holds.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) suggests that exchange rates should adjust to equalize the price of identical goods in different countries. If the inflation differential is greater than the exchange rate change, PPP does not hold, as the exchange rate has not adjusted sufficiently to offset the inflation difference.

If the Inflation Differential Between Germany and the United States