Purchasing power parity says that:
A) differences in inflation rates between countries should have no impact on the exchange rate between those countries.
B) differences in inflation rates between countries will create changes in exchange rates.
C) the changes in exchange rates move independently from inflation.
D) for inflation to change the exchange rate, the rate of inflation has to be the same between countries.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) theory suggests that differences in inflation rates between countries will result in changes in exchange rates in order to maintain the same relative purchasing power of each currency. For example, if one country has a higher inflation rate than another, its currency should depreciate to maintain purchasing power parity. Therefore, choice B is the correct answer. Choice A, C, and D are incorrect because they do not accurately reflect the theory of purchasing power parity.

Purchasing Power Parity Says That