Purchasing power parity requires the nominal exchange rate to adjust in order to maintain a constant real exchange rate.

Question

Quizplus · Accepted Answer

Purchasing power parity theory suggests that the exchange rate between two currencies should adjust to reflect the differences in inflation rates between the two countries. This adjustment in the exchange rate allows for a constant real exchange rate, which means that the purchasing power of each currency is equalized. Therefore, the statement is true.

Purchasing Power Parity Requires the Nominal Exchange Rate to Adjust