International Business Competing in the Global Market Place Study Set 4
The Ppp Theory Argues That the Exchange Rate Will Change
The PPP theory argues that the exchange rate will change even if relative prices remain unchanged.
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Inflation occurs when output increases faster than the money supply.
The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.
The PPP theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.
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