If the exchange rate is equal to the ratio of the domestic and foreign price indexes,
A)absolute PPP holds.
B)relative PPP holds.
C)one currency is said to be overvalued.
D)one currency is said to be undervalued.

Question

Quizplus · Accepted Answer

Absolute Purchasing Power Parity (PPP) holds when the exchange rate between two currencies is equal to the ratio of the domestic and foreign price indexes, meaning that a basket of goods should cost the same in both countries when prices are converted into a common currency.

If the Exchange Rate Is Equal to the Ratio of the Domestic