Absolute purchasing power parity requires that:
A)government regulations assure that prices for goods are the same in all locations.
B)the law of one price be in place and result in prices for goods in one location be equivalent to the price of those goods in another place.
C)markets function efficiently so that the price of goods are the same everywhere they are sold.
D)goods markets function efficiently and the price of goods fluctuate.

Question

Quizplus · Accepted Answer

Absolute purchasing power parity (PPP) is the theoretical concept that suggests that the exchange rate between two currencies should equal the ratio of the two countries' price level of a "basket" of goods and services. This requires the law of one price to be in place, which means that the price of identical goods in different markets should be equal once exchange rates are considered. Therefore, option B is the correct choice as it reflects the condition required for absolute PPP to hold true.

Absolute Purchasing Power Parity Requires That