According to the theory of purchasing-power parity,the nominal exchange rate between two countries must reflect the different
A)price levels in those countries.
B)resource endowments in those countries.
C)income levels in those countries.
D)standards of living between those countries.

Question

Quizplus · Accepted Answer

The theory of purchasing-power parity states that the exchange rate between two countries should adjust to reflect the differences in price levels between the two countries. In other words, if there is inflation in one country, its currency should depreciate relative to the other country's currency to reflect the higher prices. Conversely, if there is deflation in one country, its currency should appreciate relative to the other country's currency. Resource endowments, income levels, and standards of living are not considered in this theory.

According to the Theory of Purchasing-Power Parity,the Nominal Exchange Rate