Relative PPP indicates that
A)the exchange rate between any two currencies is equal to the ratio of their price indexes.
B)the same good sells for the same price internationally.
C)the percentage change in the exchange rate is equal to the inflation differential between the domestic and foreign country.
D)relative prices determine exchange rates.

Question

Quizplus · Accepted Answer

Relative PPP states that the percentage change in exchange rates should be equal to the inflation differential between two countries. It implies that currencies will appreciate or depreciate in response to the difference in changes in prices in those countries. Hence, option C is the correct answer. Option A refers to absolute PPP, which is unrealistic in practice. Option B is an extreme assumption, and option D is only partially correct as other factors also affect exchange rates.

Relative PPP Indicates That