Purchasing Power Parity implies that differences in inflation rates across counties are caused by exchange-rate depreciation.

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) theory suggests that in the long run, exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that exchange rate changes are a reflection, not a cause, of differences in inflation rates.

Purchasing Power Parity Implies That Differences in Inflation Rates Across