Over the long run, exchange rates are determined by purchasing power parity.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) states that exchange rates should adjust over time so that the same basket of goods costs the same in different countries. Therefore, in the long run, exchange rates should be determined by PPP. However, in the short run, various factors such as interest rates, political events, and market sentiment can also influence exchange rates.

Over the Long Run, Exchange Rates Are Determined by Purchasing