If the exchange rate is equal to the ratio of the domestic and foreign price indexes then:
A) the currency is said to be undervalued.
B) one currency is said to be overvalued.
C) relative purchasing power parity holds.
D) absolute purchasing power parity holds.
E) arbitrage is profitable.

Question

Quizplus · Accepted Answer

Absolute purchasing power parity holds when the exchange rate equals the ratio of domestic to foreign price indexes, indicating that goods should cost the same in both countries when prices are expressed in a common currency.

If the Exchange Rate Is Equal to the Ratio of the Domestic