Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) suggests that the exchange rate will change by a percentage that reflects the inflation differential between two countries. This is because PPP is based on the idea that the price of a basket of goods should be roughly equal in different countries once adjusted for exchange rates. In other words, inflation can impact the purchasing power of a currency and therefore impact the exchange rate between two currencies.

Purchasing Power Parity Suggests That the Exchange Rate Will on Average