The purchasing power parity theorem implies that changes in currency markets have no effects on real exchange rates.

Question

Quizplus · Accepted Answer

The purchasing power parity theorem states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods in the two countries. This implies that changes in currency markets should not have any effects on real exchange rates, which are the exchange rates adjusted for inflation.

The Purchasing Power Parity Theorem Implies That Changes in Currency