In essence,the _______________ theory predicts that changes in relative prices will result in a change in exchange rates.

Question

Quizplus · Accepted Answer

The best choice is B, purchasing power parity (PPP) theory, which predicts that changes in relative prices between countries lead to changes in the exchange rate between their currencies. This theory suggests that the exchange rate should adjust to ensure that the same basket of goods can be purchased for the same price in different countries. If the price of a basket of goods is cheaper in one country relative to another, then the currency of that country should appreciate to reflect the difference in prices. In contrast, if the price of a basket of goods is more expensive in one country relative to another, then the currency of the cheaper country should appreciate to reflect the difference in prices.

In Essence,the _______________ Theory Predicts That Changes in Relative Prices