The equivalence of the percentage change in the exchange rate to the inflation differential between countries is referred to as the:
A) Absolute PPP
B) Relative PPP
C) Interest rate parity
D) None of the above

Question

Quizplus · Accepted Answer

The equivalence of the percentage change in the exchange rate to the inflation differential between countries is referred to as Relative PPP. Absolute PPP refers to the idea that a product should cost the same in different countries when measured in the same currency. Interest rate parity refers to the idea that the interest rate differential between two countries is equal to the expected change in the exchange rate over that same period.

The Equivalence of the Percentage Change in the Exchange Rate