If purchasing power parity holds,the exchange rate (e)can be expressed as a function of the domestic price (P)and the foreign price (P*)as
A) e = P - P*.
B) e = P* - P.
C) e = P* + P.
D) e = P/P*.

Question

Quizplus · Accepted Answer

According to the concept of purchasing power parity, the exchange rate between two currencies should equal the ratio of the domestic price level to the foreign price level. Therefore, the correct formula for the exchange rate is e = P/P*.

If Purchasing Power Parity Holds,the Exchange Rate (E)can Be Expressed