According to the Purchasing Power Parity theory, the rate of exchange between the currencies of two countries is determined by-------
A)their relative price levels
B)their import and export volumes
C)their import and export values
D)their relative capital movements

Question

According to the Purchasing Power Parity theory, the rate of exchange between the currencies of two countries is determined by-------                      
A)their relative price levels
B)their import and export volumes
C)their import and export values
D)their relative capital movements

Quizplus · Accepted Answer

The Purchasing Power Parity (PPP) theory posits that the exchange rate between two countries' currencies is determined by their relative price levels. This means that in the long run, the exchange rate should adjust so that an identical good in two different countries has the same price when expressed in the same currency.

According to the Purchasing Power Parity Theory, the Rate of Exchange