Empirical tests indicate that persistent inflation differentials between two currencies eventually have an impact on nominal exchange rates.

Question

Quizplus · Accepted Answer

Empirical tests have shown that over time, persistent differences in inflation rates between two currencies will lead to a decline in the value of the currency with higher inflation, leading to an eventual impact on exchange rates. This is known as the purchasing power parity theory.

Empirical Tests Indicate That Persistent Inflation Differentials Between Two Currencies