If purchasing power parity holds between the United States and China:
A) the real exchange rate must be 1.
B) the nominal exchange rate must be 1.
C) the United States must no longer have a trade deficit.
D) China must no longer have a trade deficit.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) refers to the theory that in the long-run, exchange rates should adjust so that an identical basket of goods and services would cost the same amount in both countries. If purchasing power parity holds between the United States and China, then the real exchange rate (the exchange rate adjusted for inflation) must be 1, meaning that the price of the same basket of goods and services is equivalent in both countries. This does not necessarily mean that either country would no longer have a trade deficit.

If Purchasing Power Parity Holds Between the United States and China