Purchasing power parity is a good theory of explaining exchange rate behavior:

Question

Quizplus · Accepted Answer

Purchasing power parity theory postulates that exchange rate will adjust in the long run to equate the prices of identical goods and services in different countries. Therefore, the theory is best applied over a very long period, such as decades, to capture any persistent differences in prices and inflation rates between countries. Over short periods, other factors such as market sentiment, speculation, and economic policies dominate exchange rate behavior, making PPP less reliable in predicting exchange rate movements over short periods.

Purchasing Power Parity Is a Good Theory of Explaining Exchange