If PPP holds precisely, then the real exchange rate will be:
A) stationary
B) volatile
C) mean reverting
D) constant

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) theory posits that in the long run, exchange rates should adjust to equalize the price of identical goods and services in different countries. If PPP holds precisely, the real exchange rate (which adjusts the nominal exchange rate for differences in price levels between countries) would be constant, as any deviations from PPP would be corrected by changes in the nominal exchange rate or price levels, ensuring that the real value of currencies remains stable over time.

If PPP Holds Precisely, Then the Real Exchange Rate Will