Purchasing power parity is the theory that nominal exchange rates are determined:
A)by the forces of supply and demand.
B)by real exchange rates.
C)as necessary to achieve the fundamental value of the exchange rate.
D)as necessary for the law of one price to hold.

Question

Quizplus · Accepted Answer

Since the law of one price says that a given good will fetch the same price worldwide, then nominal exchange rates are determined to uphold the law of one price. This theory of nominal exchange rates is called purchasing power parity.

Purchasing Power Parity Is the Theory That Nominal Exchange Rates