If absolute purchasing power parity holds, under fixed exchange rates:

Question

Quizplus · Accepted Answer

Absolute purchasing power parity implies that the prices of identical goods in different countries, when expressed in the same currency, should be equal. Therefore, under fixed exchange rates, any difference in inflation rates between two countries will lead to an adjustment in the exchange rate to maintain the parity. In other words, the exchange rate will adjust such that the purchasing power of a unit of currency in both countries remains the same. Thus, option B is correct as it states that the home inflation rate equals the foreign inflation rate. Options A and C are not correct as they do not necessarily follow from absolute purchasing power parity under fixed exchange rates.

If Absolute Purchasing Power Parity Holds, Under Fixed Exchange Rates