What does purchasing-power parity imply for the exchange rate?
A) that the real exchange rate is equal to one
B) that the nominal exchange rate is equal to one
C) that the real exchange rate is equal to the nominal exchange rate
D) that the real exchange rate is equal to the difference in inflation rates between the two countries

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) implies that the real exchange rate is equal to one, meaning that a basket of goods should cost the same in two different countries when prices are converted into a common currency at the prevailing exchange rate. This concept does not directly relate to the nominal exchange rate being one, the real exchange rate equating to the nominal exchange rate, or the real exchange rate being the difference in inflation rates between two countries.

What Does Purchasing-Power Parity Imply for the Exchange Rate