According to the concept of "purchasing power parity," changes in exchange rates among: countries will reflect differences in:
A) the gold stock in each country.
B) the rates of inflation.
C) fiscal policy.
D) growth rates.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) theory states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries will adjust to reflect changes in the price levels, or rates of inflation, of the two countries. Therefore, differences in inflation rates are what PPP focuses on, not gold stocks, fiscal policies, or growth rates.

According to the Concept of "Purchasing Power Parity," Changes in Exchange