Purchasing power parity means that:
A) exchange rates are the same in different foreign-exchange markets at any given time.
B) interest rates will be the same across countries at any given time.
C) exchange rates will adjust to offset differing inflation rates between countries.
D) the law of one price will never hold.
E) inflation does not affect exchange rates.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is the economic theory that suggests exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries will adjust to reflect changes in the price levels of the two countries, thereby offsetting differing inflation rates.

Purchasing Power Parity Means That