The purchasing power parity theory claims that a change in relative ________ between two countries must cause a change in ________ in order to keep the prices of goods in two countries fairly similar.
A)exchange rates; inflation
B)inflation; exchange rates
C)interest rates; inflation
D)interest rates; exchange rates

Question

Quizplus · Accepted Answer

The purchasing power parity (PPP) theory posits that changes in inflation rates between two countries lead to changes in exchange rates. This adjustment ensures that the price levels of goods and services remain relatively consistent across countries, maintaining the purchasing power of currencies.

The Purchasing Power Parity Theory Claims That a Change in Relative