If,in the long run,the purchasing power parity theory held true for two countries,what would we expect of the exchange rate for each of these two countries?

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, the exchange rate between two countries should be proportionate to their relative price levels. If the theory holds true in the long run, we would expect the exchange rate to reflect the relative price levels in each country, resulting in a proportionate exchange rate. Therefore, Option A is the correct answer.

If,in the Long Run,the Purchasing Power Parity Theory Held True