According to the purchasing power parity theory, which of the following is most likely to affect exchange rates?

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, differences in inflation rates between two countries should lead to changes in the exchange rate between their currencies. Specifically, if one country experiences higher inflation than another, the exchange rate between their currencies will adjust so that the cost of goods and services is equalized across the two countries in the long run. Therefore, Option A is the most likely to affect exchange rates. Choices B, C, and D could also have some impact on exchange rates, but the PPP theory specifically highlights inflation rate differences as the key determinant.

According to the Purchasing Power Parity Theory, Which of the Following