The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Which of the following holds true, if goods sell for the same price worldwide when converted to a common currency?
A)A high rate of inflation exists.
B)A fixed exchange-rate system exists.
C)Purchasing power parity exists.
D)The foreign exchange market is in equilibrium.
E)Arbitrage opportunities exist.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Which of the following holds true, if goods sell for the same price worldwide when converted to a common currency?
A)A high rate of inflation exists. 
B)A fixed exchange-rate system exists. 
C)Purchasing power parity exists. 
D)The foreign exchange market is in equilibrium. 
E)Arbitrage opportunities exist.

Quizplus · Accepted Answer

Purchasing power parity (PPP) exists when goods sell for the same price worldwide when converted to a common currency. This suggests that exchange rates should adjust to reflect differences in inflation rates across countries. Therefore, if PPP holds true, it indicates that the foreign exchange market is in equilibrium and there are no arbitrage opportunities. A fixed exchange-rate system would not necessarily result in goods selling for the same price worldwide when converted to a common currency, and a high rate of inflation would likely lead to differences in prices for goods across countries.

The Figure Given Below Depicts the Foreign Exchange Market for British