The theory of relative purchasing power parity states that,between two nations,the
A)inflation rates are unrelated
B)exchange rate differential reflects the inflation rate differential
C)inflation rate is smaller in weaker currencies
D)the interest rate is greater than the inflation rate during depreciations

Question

Quizplus · Accepted Answer

The theory of relative purchasing power parity states that the exchange rate differential between two nations reflects the inflation rate differential. In other words, if one country experiences higher inflation than another, its currency should depreciate relative to the other country's currency to maintain parity in the purchasing power of the two currencies. This suggests that the exchange rate should move in the same direction as the inflation rate differential between two countries.

The Theory of Relative Purchasing Power Parity States That,between Two