If absolute purchasing power parity holds true and the ratio of the domestic price level to the foreign price level is greater than the actual nominal exchange rate, then the domestic currency is currently overvalued.

Question

Quizplus · Accepted Answer

If the ratio of the domestic price level to the foreign price level is greater than the actual nominal exchange rate, this means that the domestic currency is able to buy more goods relative to the foreign currency than the nominal exchange rate suggests. This indicates that the domestic currency is overvalued and will likely depreciate to restore equilibrium.

If Absolute Purchasing Power Parity Holds True and the Ratio