In the context of exchange rates, the principle of purchasing power parity can be interpreted as the exchange rate between two nations' currencies being equal to the ratio of their price levels.

Question

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This is the correct definition of the principle of purchasing power parity. It means that the exchange rate between two countries' currencies should reflect the relative prices of goods and services in each country. If one country has higher prices than the other, its currency should weaken relative to the other country's currency to maintain parity.

In the Context of Exchange Rates, the Principle of Purchasing