Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?
A) The Law of One Price
B) Absolute Purchasing Power Parity
C) Relative Purchasing Power Parity
D) The International Fisher Effect

Question

Quizplus · Accepted Answer

Relative Purchasing Power Parity (PPP) is considered the most relevant to explaining what drives exchange rate values because it accounts for inflation differentials between countries, which can affect exchange rates over time. Absolute PPP, while foundational, is less practical due to its assumption of identical goods and services across countries. The Law of One Price and the International Fisher Effect focus on other aspects of financial theory that are less directly related to exchange rate movements.

Which of the Following Versions of PPP Is Thought to Be