One of the most fundamental determinants of the exchange rate is ______________ whereby the exchange rate between the currencies of two countries is in equilibrium when it equates the prices of a basket of goods and services in both countries.
A)free float
B)free float (dirty)
C)managed float
D)purchasing power parity (PPP)
E)absolute cost advantage

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) is the economic theory that states the exchange rate between two currencies should equalize the price of a basket of goods and services in both countries, thus establishing a basis for fair trade and comparison of real income levels across countries.

One of the Most Fundamental Determinants of the Exchange Rate