The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Purchasing power parity exists when domestic currency:
A)maintains a fixed exchange rate with foreign currency.
B)is not convertible into foreign currency.
C)buys more goods at home than abroad.
D)buys as many goods at home as it does abroad.
E)appreciates in value against foreign currency.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Purchasing power parity exists when domestic currency:
A)maintains a fixed exchange rate with foreign currency. 
B)is not convertible into foreign currency. 
C)buys more goods at home than abroad. 
D)buys as many goods at home as it does abroad. 
E)appreciates in value against foreign currency.

Quizplus · Accepted Answer

Purchasing power parity (PPP) exists when domestic currency buys as many goods at home as it does abroad. This means that the exchange rate between two currencies will adjust to equalize the prices of an identical basket of goods and services in both countries. Therefore, option D is the correct answer.

The Figure Given Below Depicts the Foreign Exchange Market for British