According to the purchasing power parity theory, a change in relative interest rates between two countries must cause a change in exchange rates.

Question

Quizplus · Accepted Answer

The purchasing power parity (PPP) theory primarily links changes in exchange rates to changes in price levels between two countries, not directly to changes in relative interest rates. Interest rates might indirectly affect exchange rates through their impact on inflation and thus on purchasing power, but PPP itself focuses on the relationship between price levels and exchange rates.

According to the Purchasing Power Parity Theory, a Change in Relative