In essence, PPP theory predicts that the exchange rate will change if relative ______________ change.

Question

Quizplus · Accepted Answer

PPP theory, or Purchasing Power Parity, predicts that exchange rates will adjust to compensate for changes in relative prices between two countries. This means if the price level of one country increases relative to another, the currency of the country with higher price levels should depreciate to restore purchasing power parity.

In Essence, PPP Theory Predicts That the Exchange Rate Will