According to the theory of purchasing power parity,exchange rates will adjust so that differences in:
A) interest rates across countries are offset.
B) forward rates across countries are offset.
C) expected inflation across countries are offset.
D) international Fisher rates are offset.

Question

Quizplus · Accepted Answer

The theory of purchasing power parity states that exchange rates between two countries should adjust to reflect the relative differences in their expected inflation rates. This means that if one country is expecting higher inflation than another, its currency should depreciate relative to the other country's currency in order to maintain parity in the purchasing power of each currency. Choices A, B, and D do not accurately reflect this theory.

According to the Theory of Purchasing Power Parity,exchange Rates Will