If changes in the exchange rate are determined by the difference in inﬂation rates between two countries then ________________ holds.

Question

Quizplus · Accepted Answer

This statement is referring to the concept of relative purchasing power parity, which suggests that changes in exchange rates will reflect differences in the inflation rates between two countries. This theory suggests that currencies with a higher inflation rate will depreciate relative to currencies with a lower inflation rate.

If Changes in the Exchange Rate Are Determined by the Difference