In converting currencies to a common denominator such as the dollar, the procedure that uses the cost of a given basket of goods and services as the basis for setting the conversion rate for one currency into another is known as:
A) exchange rate parity.
B) consumer price index parity.
C) purchasing power parity.
D) GDP deflator parity.
E) central bank parity.

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) is the method that uses the cost of a given basket of goods and services to determine the conversion rate for one currency into another, aiming to equalize the purchasing power of different currencies by eliminating the differences in price levels between countries.

In Converting Currencies to a Common Denominator Such as the Dollar