Relative PPP indicates that
A) The same goods are sold for the same price internationally.
B) The exchange rate between two countries is equal to the ratio of their price indexes.
C) The percentage change in the exchange rate is equal to the inflation differential between two countries.
D) The inflation differential between two countries is equal to the forward premium.

Question

Quizplus · Accepted Answer

Relative Purchasing Power Parity (PPP) suggests that the rate of change in the exchange rate between two countries' currencies over a period is approximately equal to the difference in their inflation rates over the same period. This concept is based on the idea that inflation (a general increase in prices) affects the purchasing power of money, and thus, the exchange rate adjusts to maintain the relative purchasing power of the two currencies.

Relative PPP Indicates That