If exchange rates adjust to reflect inflation differentials across countries, then:
A)The law of one price will always hold
B)No one will use forward currency markets
C)Interest rates will be equal across countries
D)PPP is said to hold

Question

Quizplus · Accepted Answer

If exchange rates adjust to reflect inflation differentials across countries, PPP (Purchasing Power Parity) is said to hold. PPP suggests that the exchange rate between two currencies should equalize the prices of a basket of goods and services in both countries, allowing for a comparison of the two currencies on a more equitable basis, and that inflation differentials between nations should be reflected in the exchange rate.

If Exchange Rates Adjust to Reflect Inflation Differentials Across Countries