If the exchange rate equals the ratio of price indexes in two countries, there is said to be

Question

Quizplus · Accepted Answer

Absolute purchasing-power parity (PPP) asserts that the exchange rate between two countries will be equal to the ratio of the price indexes of the respective countries. This means that a unit of currency in one country should have the same purchasing power as a unit of currency in another country after conversion. If this condition is met, goods and services will have the same price in both countries, and there will be no arbitrage opportunities. Therefore, option B is the correct answer.

If the Exchange Rate Equals the Ratio of Price Indexes