The theory of purchasing power parity predicts
A) stable domestic prices in the long and short runs on both sides of an international transaction.
B) stable real exchange rates in the long and short runs that maintain relative purchasing powers across international borders.
C) stable domestic and foreign prices for traded goods in the long run but uncertain real exchange rates in the short term.
D) variable relative prices of foreign goods driven by uncertainty in the real exchange rate.
E) none of the above.

Question

Quizplus · Accepted Answer

The theory of purchasing power parity (PPP) predicts that in the long run, exchange rates will adjust so that an identical good in two different countries will have the same price when expressed in a common currency. This implies stable real exchange rates over the long term that maintain relative purchasing power across borders, aligning with choice B.

The Theory of Purchasing Power Parity Predicts