According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:
A)unemployment rates
B)export competitiveness
C)inflation rates
D)foreign exchange reserves

Question

Quizplus · Accepted Answer

PPP (Purchasing Power Parity) theory suggests that foreign currency exchange rates between two countries adjust to reflect changes in each country’s inflation rates. If the inflation rate is higher in one country, its currency will depreciate relative to another country with lower inflation rates. This is because higher inflation reduces the purchasing power of a country's currency compared to the other. Therefore, option C is the correct answer.

According to PPP, Foreign Currency Exchange Rates Between Two Countries