The theory that the exchange rate reflects the relative purchasing power in each country is known as:
A) exchange rate parity.
B) purchasing power parity.
C) consumer price parity.
D) inflation-adjusted foreign exchange.
E) inflation adjusted parity.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is the economic theory that states that the exchange rate between two currencies is equal to the ratio of the currencies' respective purchasing power. This theory posits that in the absence of transaction costs and other barriers, identical goods should have the same price in different countries when prices are converted into a common currency.

The Theory That the Exchange Rate Reflects the Relative Purchasing