The theory of purchasing power parity assumes:
A) the real exchange and nominal exchange rates are fixed.
B) the nominal exchange rate is fixed but the real exchange rate is flexible.
C) the real exchange rate is fixed but the nominal exchange rate is flexible.
D) the real exchange rate varies with the inflation differential.

Question

Quizplus · Accepted Answer

Purchasing power parity assumes that the real exchange rate is fixed, meaning that any changes in nominal exchange rates are offset by changes in price levels between countries.

The Theory of Purchasing Power Parity Assumes