If relative purchasing power parity holds, then:
A) the law of one price will hold.
B) absolute PPP will hold.
C) both the law of one price and absolute PPP will hold.
D) All of the above
E) None of the above

Question

Quizplus · Accepted Answer

Relative purchasing power parity (PPP) does not guarantee that the law of one price or absolute PPP will hold. It only suggests that the rate of change in prices between two countries will be reflected in the change in their exchange rate over time, not that prices for individual goods or the general price levels will be the same when converted at the current exchange rate.

If Relative Purchasing Power Parity Holds, Then