Differences in inflation rates between two countries can explain:
A) short-run changes in the exchange rate but not long-run changes.
B) changes in the real exchange rate over the long run, but not changes in the nominal exchange rate.
C) long-run changes in the exchange rate but not short-run changes.
D) changes in the exchange rate in both the short run and the long run.

Question

Quizplus · Accepted Answer

Differences in inflation rates between two countries can lead to changes in the exchange rate over the long run due to purchasing power parity, which suggests that currencies will adjust to reflect changes in price levels between countries.

Differences in Inflation Rates Between Two Countries Can Explain