Which of the following does purchasing-power parity conclude should equal 1?
A)both the nominal and the real exchange rate.
B)the nominal exchange rate but not the real exchange rate
C)the real exchange rate but not the nominal exchange rate
D)neither the nominal exchange rate nor the real exchange rate

Question

Quizplus · Accepted Answer

Purchasing-power parity concludes that the real exchange rate should equal 1. This means that the price of a basket of goods in one country should be the same as the price of the same basket of goods in another country, after adjusting for the exchange rate. The nominal exchange rate, on the other hand, is simply the rate at which one currency can be exchanged for another and is not necessarily influenced by the relative prices of goods across countries. Hence, purchasing-power parity does not require the nominal exchange rate to be equal to 1.

Which of the Following Does Purchasing-Power Parity Conclude Should Equal