In essence,PPP theory predicts that changes in relative prices will result in a change in:

Question

Quizplus · Accepted Answer

PPP theory states that changes in relative prices between two countries will result in a change in their exchange rates. This means that the currency of the country whose prices have increased relative to the other will depreciate, whereas the currency of the country whose prices have decreased will appreciate. This is because the purchasing power of the currency with higher relative prices will decrease, and hence, its value will decrease. Conversely, the purchasing power of the currency with lower relative prices will increase, and hence, its value will increase.

In Essence,PPP Theory Predicts That Changes in Relative Prices Will