According to the theory of purchasing-power parity, what must the nominal exchange rate between two countries reflect?
A) the different price levels in those countries
B) the different resource endowments in those countries
C) the different income levels in those countries
D) the different standards of living between those countries

Question

Quizplus · Accepted Answer

The theory of purchasing-power parity suggests that the nominal exchange rate between two countries should reflect the different price levels in those countries. This means that if Country A has a higher level of prices compared to Country B, then the exchange rate should adjust so that goods in both countries have the same relative prices to each other. This helps to equalize the purchasing power of the currencies in each country.

According to the Theory of Purchasing-Power Parity, What Must the Nominal