The relative purchasing power parity theory postulates that:
A) The equilibrium exchange rate is equal to the ratio of the price level in the two nations
B) the change in the exchange rate over a period of time should be proportional to the relative change in the price level in the two nations over the same time period
C) the change in the exchange rate over a period of time should be proportional to the absolute change in the price level in the two nations over the same time period
D) the exchange rate at a period of time should be proportional to the relative prices in the two nations

Question

Quizplus · Accepted Answer

The relative purchasing power parity theory postulates that the change in the exchange rate over a period of time should be proportional to the relative change in the price level in the two nations over the same time period. This means that as the price level in one country increases relative to another country, the exchange rate should change in proportion to reflect the change in purchasing power. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect because they do not accurately describe the theory of relative purchasing power parity.

The Relative Purchasing Power Parity Theory Postulates That