The _________ suggests that the exchange rate between two currencies should, in the long run, reflect purchasing power differences.

Question

Quizplus · Accepted Answer

Purchasing power parity is the theory that suggests that in the long run, the exchange rate between two currencies should reflect the differences in their purchasing power. This means that the exchange rate should adjust so that the same basket of goods can be purchased in each country for the same price in the local currency. Target-zone arrangement and fixed-rate system are exchange rate systems, while independent float refers to a policy of allowing the exchange rate to be determined by market forces.

The _________ Suggests That the Exchange Rate Between Two Currencies