The "purchasing-power-parity" theory states that the most important determinant of exchange rates is their role in equating ________ between trading nations.

Question

Quizplus · Accepted Answer

The "purchasing-power-parity" theory relates to the prices of identical goods between trading nations. It suggests that exchange rates will adjust to equate the cost of buying the same basket of goods in different countries. In other words, the theory posits that the exchange rate between two currencies should adjust to reflect any differences in the inflation rates of the two countries. Therefore, choice B (inflation rates) is a correct option in this question, but the most precise option is C (prices of identical goods). The other choices, nominal interest rates (A) and nominal GDP growth rates (D), are not directly related to the "purchasing-power-parity" theory.

The "Purchasing-Power-Parity" Theory States That the Most Important Determinant of Exchange