While the law of one price relates prices on individual goods to the exchange rate, the theory of PPP relates:
A) the relative price level of a basket of goods to the exchange rate.
B) prices of individual goods to consumer demand.
C) exchange rates to interest rates.
D) goods markets to the market for services.

Question

Quizplus · Accepted Answer

The theory of PPP (Purchasing Power Parity) relates the relative price level of a basket of goods (or a measure of overall price levels) to the exchange rate. This means that the PPP theory suggests that, over time, the exchange rate between two currencies will adjust to reflect the differences in the price levels of a basket of goods between those two countries.

While the Law of One Price Relates Prices on Individual