________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

Question

Quizplus · Accepted Answer

Relative Purchasing Power Parity theory suggests that changes in price levels between two countries over time will result in a proportional change in their exchange rate. This means if one country experiences higher inflation than another, its currency should depreciate relative to the other country's currency to maintain purchasing power parity.

________ States That Differential Rates of Inflation Between Two Countries