When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.

Question

Quizplus · Accepted Answer

Purchasing power parity is a benchmark model used to describe what people think an exchange rate value should be. It is based on the idea that in the long run, exchange rates should adjust to match the differences in inflation rates between two countries. This is because if the inflation rate is higher in one country, its currency will be worth less in that country than in one with a lower inflation rate. Therefore, purchasing power parity suggests that the exchange rate between two countries should reflect the relative purchasing power of their currencies. The other options are also related to exchange rates, but they are not typically used as benchmark models to describe what the exchange rate value should be.

When People Describe What They Think an Exchange Rate Value