The theory of purchasing power parity implies the real exchange rate between two countries is:
A)Flexible
B)Less than one
C)Greater than one
D)Equal to one

Question

Quizplus · Accepted Answer

The theory of purchasing power parity (PPP) states that the exchange rate between two countries should adjust to equalize the prices of a similar basket of goods and services in each country. Therefore, the real exchange rate between the two countries should be equal to one, indicating that the exchange rate reflects the differences in inflation rates between the two countries.

The Theory of Purchasing Power Parity Implies the Real Exchange