If the purchasing power of the dollar is less than the purchasing power of the British pound,purchasing power parity predicts that the exchange rate will

Question

Quizplus · Accepted Answer

Purchasing power parity states that in the long run, the exchange rate between two currencies will be equal to the ratio of their purchasing power. Therefore, in this scenario, the exchange rate between the dollar and the pound will adjust to reflect the difference in purchasing power between the two currencies, resulting in an exchange rate that reflects their relative purchasing power. Options A and B are incorrect as they assume that exchange rate changes are the only way that purchasing power parity can be achieved, which is not necessarily true.

If the Purchasing Power of the Dollar Is Less Than