Under absolute purchasing-power parity,

Question

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Absolute purchasing-power parity states that the exchange rate between two currencies will adjust so that the same basket of goods will have the same price in both countries. Therefore, when both countries have equal price indices, the exchange rate will be 1 (i.e., one unit of currency in one country will be equal to one unit of currency in the other country). Option B (interest-rate parity) relates to the relationship between exchange rates and interest rates, which is not directly related to absolute purchasing-power parity. Option C (relative purchasing-power parity) is not applicable as we are discussing absolute purchasing-power parity. Option D is incorrect because it is describing relative purchasing-power parity.

Under Absolute Purchasing-Power Parity