The ________ version of the theory of PPP says that the spot exchange rate is determined by the relative prices of a similar market basket of goods. The ________ version of PPP says that changes in differential rates of inflation over the years tend to be offset by an equal and opposite change in the spot exchange rate.

Question

Quizplus · Accepted Answer

The first blank refers to the relative version of PPP, which compares the prices of similar baskets of goods. The second blank refers to the idea that changes in inflation rates are offset by changes in the exchange rate, which is the relative version of PPP. Absolute PPP, on the other hand, only looks at the price level of a single good. Therefore, the correct choices are C: absolute and relative.

The ________ Version of the Theory of PPP Says That