The theory of purchasing-power parity primarily explains
A)why trade deficits tend to move to zero over time.
B)how foreign prices affect domestic prices.
C)the determination of the real exchange rate.
D)why a change in the real exchange rate changes a country's net exports.

Question

Quizplus · Accepted Answer

The theory of purchasing-power parity explains the determination of the real exchange rate, which is the rate at which goods and services can be traded between countries. It suggests that in the long-run, the exchange rate between two countries should adjust to equalize the prices of an identical basket of goods and services in each country, taking into account the currency exchange rate.

The Theory of Purchasing-Power Parity Primarily Explains