If the cost of buying an identical basket of goods in country A is greater than country B:

Question

Quizplus · Accepted Answer

If the cost of buying an identical basket of goods in country A is greater than country B, people will tend to sell currency from country A and buy currency from country B. This will result in an increased demand for currency from country B and a decrease in demand for currency from country A. As a result, the currency value of country B will appreciate relative to country A, which will cause the prices of those baskets of goods to converge. If the goods in the baskets are internationally traded, the tendency for prices to converge will be stronger because international competition will exert pressure on producers to keep prices in line with global prices. Therefore, all of the above statements are true.

If the Cost of Buying an Identical Basket of Goods