Purchasing Power Parity (PPP) theory primarily concerns the real exchange rate, ensuring that it remains constant over time if PPP holds. This means that the purchasing power of currencies should adjust to inflation rates, keeping the real exchange rate stable, regardless of movements in nominal exchange rates.

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If PPP Holds

Question 9

Multiple Choice

If PPP holds

A) The nominal exchange rate will not change.
B) The real exchange rate will not change.
C) Both real and nominal exchange rates will not change.
D) Both real and nominal exchange will move together

Correct Answer: