According to the theory of purchasing power parity, exchange rates will adjust so that differences in:
A)Interest rates across countries are offset
B)Forward rates across countries are offset
C)Expected inflation across countries is offset
D)International Fisher rates are offset

Question

Quizplus · Accepted Answer

The theory of purchasing power parity suggests that exchange rates will adjust to ensure that similar goods in different countries have the same price, after accounting for the exchange rate. This means that if there is an expectation of higher inflation in one country compared to another, the currency of the country with higher inflation is expected to depreciate to offset the inflation differential. Therefore, differences in expected inflation across countries will be offset.

According to the Theory of Purchasing Power Parity, Exchange Rates