According to the purchasing power parity theory of exchange rates:
A)a dollar, when converted to other currencies at the prevailing flexible exchange rate, has the same purchasing power in various countries.
B)in equilibrium, national currencies have equal value in terms of gold.
C)the higher a nation's price level in terms of its own currency, the greater is the amount of foreign exchange it can obtain for a unit of its currency.
D)all of the above are true.

Question

Quizplus · Accepted Answer

The purchasing power parity theory of exchange rates suggests that in the long run, exchange rates should adjust in a way that the same basket of goods and services should cost the same amount in different countries. This implies that a dollar should have the same purchasing power in different countries when converted at the prevailing exchange rate. Choice B is incorrect because the theory of purchasing power parity is based on price levels of goods and services and not gold. Choice C is incorrect as it describes the principle of law of one price, which is related to the theory of purchasing power parity but not the same.

According to the Purchasing Power Parity Theory of Exchange Rates