Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following?

Question

Quizplus · Accepted Answer

Relative purchasing power parity theory states that the exchange rate between two countries should be determined by the difference in their inflation rates. If the inflation rate in one country is higher than the other, its currency will depreciate relative to the other country's currency to preserve the balance of the purchasing power of the currencies. Therefore, the expected percentage change in the exchange rate between two countries is equal to the difference in the inflation rates of the two countries.

Relative Purchasing Power Parity Is Based on the Principle That