If the price levels in two countries are equal, then the real exchange rate between their currencies equals the nominal exchange rate.

Question

Quizplus · Accepted Answer

If the price levels in two countries are equal, then the purchasing power parity (PPP) holds. This means that the nominal exchange rate between their currencies reflects the relative prices of goods and services in each country. Therefore, in this case, the real exchange rate (which adjusts for differences in inflation rates between the two countries) is equal to the nominal exchange rate.

If the Price Levels in Two Countries Are Equal, Then