The 'theory of purchasing power parity' implies that:
A)in the long run, the prices of goods in different countries will be the same when measured in a common currency.
B)the prices of goods in different countries are always the same.
C)the nominal exchange rates will equate over time.
D)demand and supply have no influence over the exchange rate.

Question

Quizplus · Accepted Answer

The theory of purchasing power parity suggests that over the long run, the prices of goods in different countries will be equal when measured in a common currency. This is because changes in the exchange rate will adjust to reflect differences in inflation rates between countries. Therefore, A is the correct choice. B is incorrect because this theory only applies in the long run, and short-term deviations can occur due to various factors. C is partially correct, as nominal exchange rates will adjust over time to reflect changes in inflation rates, but this is a result of PPP rather than a direct implication. D is incorrect, as demand and supply factors can still have an impact on the exchange rate in the short run.

The 'Theory of Purchasing Power Parity' Implies That