Which of the following is a statement of the purchasing power parity (PPP) theory of exchange rate determination? The exchange rate will adjust in the
A)long run until the interest rate is roughly the same in both countries.
B)long run until real GDP is roughly the same in both countries.
C)long run until the average price of goods is roughly the same in both countries.
D)short run until the average price of goods is roughly the same in both countries.

Question

Quizplus · Accepted Answer

The PPP theory of exchange rate determination states that in the long run, the exchange rate will adjust until the average price of goods is roughly the same in both countries. This means that if the relative price level of goods in one country is higher than the other, the exchange rate between their currencies will adjust to compensate for the difference and achieve purchasing power parity. This is based on the idea that trade should equalize the prices of identical goods in different countries, taking into account exchange rates and transportation costs.

Which of the Following Is a Statement of the Purchasing