Purchasing-power parity says that the nominal exchange rate must equal the real exchange rate.

Question

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Purchasing-power parity (PPP) theory states that in the long run, exchange rates should adjust so that the same basket of goods costs the same amount in two different countries when priced in the same currency. It does not imply that the nominal exchange rate must equal the real exchange rate; rather, it suggests that the real exchange rate should approach parity (equality in purchasing power) over time.

Purchasing-Power Parity Says That the Nominal Exchange Rate Must Equal