The relationship between product price levels and exchange rates is explained by:
A) Currency boards.
B) Purchasing power parity.
C) Per capita income levels.
D) Interest rate parity.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) explains the relationship between product price levels and exchange rates. PPP suggests that the exchange rate between two countries should equalize the price levels of a basket of goods, accounting for any differences in currency values. In other words, if a basket of goods costs $100 in the US and the same basket costs €80 in Europe, PPP predicts that the exchange rate should be $1.25 per €1 to equalize the prices.

The Relationship Between Product Price Levels and Exchange Rates Is