According to purchasing power parity (PPP), foreign currency exchange rates between two countries adjust to reflect changes in each country's
A)unemployment rates.
B)export competitiveness.
C)inflation rates.
D)foreign exchange reserves.
E)reserve requirements.

Question

Quizplus · Accepted Answer

Purchasing power parity theory suggests that exchange rates between two countries will adjust to equalize the prices of identical goods and services in each country. This means that changes in each country's inflation rates will affect the exchange rate between the two currencies. If one country experiences higher inflation than the other, its currency will depreciate relative to the other country's currency.

According to Purchasing Power Parity (PPP), Foreign Currency Exchange Rates