Relative purchasing power parity occurs when
A)purchasing power parity holds between two countries.
B)purchasing power parity only holds in recessions.
C)the nominal exchange rate is constant.
D)the real exchange rate is constant.

Question

Quizplus · Accepted Answer

Relative purchasing power parity refers to a situation where the real exchange rate remains constant over time. This means that changes in the nominal exchange rate between two countries are adjusted for changes in relative price levels, allowing for a comparison of purchasing power between the two currencies. Therefore, option D is the correct answer as it describes the definition of relative purchasing power parity. Option A is incorrect as it conflates relative and absolute purchasing power parity. Option B is incorrect as there is no evidence to suggest that purchasing power parity only holds in recessions. Option C is incorrect as the nominal exchange rate can fluctuate even when relative purchasing power parity exists.

Relative Purchasing Power Parity Occurs When