For purchasing-power parity to exist:
A) Flows of currency in the trade account must be offset by flows of currency in the capital account
B) The nominal interest rate must be equal to the real interest rate in all countries
C) Converting a sum of funds from one currency to another does not alter its purchasing power
D) A country's trade account must always be in balance

Question

Quizplus · Accepted Answer

Purchasing-power parity refers to the idea that in the long-run, exchange rates between two currencies should equalize the purchasing power of each currency. In other words, if two countries produce identical goods and services, they should sell for the same price when translated into a common currency. Choice C is therefore the correct answer as it states that converting funds from one currency to another does not alter its purchasing power, which is a necessary component of purchasing-power parity. Choices A, B, and D are incorrect as they are either unrelated or only partially related to the concept of purchasing-power parity.

For Purchasing-Power Parity to Exist