The idea that flexible exchange rates equate the purchasing power of national currencies is called the:
A)equation of exchange.
B)balance of payments.
C)gold standard.
D)purchasing power parity theory.

Question

Quizplus · Accepted Answer

The idea that flexible exchange rates equate the purchasing power of national currencies is called the purchasing power parity theory. This theory suggests that the exchange rate between two currencies should adjust until the cost of an identical basket of goods is the same in both countries, after accounting for the exchange rate.

The Idea That Flexible Exchange Rates Equate the Purchasing Power