According to the theory of purchasing power parity, exchange rates will adjust so that differences in:
A)interest rates across countries are offset.
B)forward rates across countries are offset.
C)expected inflation across countries is offset.
D)international Fisher rates are offset.

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity, exchange rates will adjust so that differences in expected inflation across countries is offset. This means that if a country has a higher expected inflation rate than another country, their currency value should depreciate so that goods in both countries become more or less equal in price.

According to the Theory of Purchasing Power Parity, Exchange Rates