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

Question

Quizplus · Accepted Answer

The theory of purchasing-power parity states that the nominal exchange rate between two countries must reflect the differing price levels in those countries. In other words, if the price level in one country is higher than in another, the exchange rate should adjust to reflect that difference in purchasing power. This is because, in the absence of trade barriers and transportation costs, consumers would seek to buy goods where they are cheaper, and the exchange rate would adjust to make that possible.

According to the Theory of Purchasing-Power Parity,the Nominal Exchange Rate