In the long run,exchange rates
A) are determined by business cycle fluctuations
B) are determined by movements of hot money
C) will adjust until the price of a bundle of goods is the same in both countries
D) will reflect economic fluctuations in both countries
E) are still a mystery to most economists

Question

Quizplus · Accepted Answer

In the long run, the exchange rates will adjust until the same bundle of goods costs the same in both countries, which is known as purchasing-power parity. This is because buyers will take advantage of the lower prices in one country and the goods will become more expensive until they are equalized with the other country. This theory suggests that exchange rates should be determined by relative price levels and inflation rates.

In the Long Run,exchange Rates