Which of the following statements is true?

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) theory states that in the long run, exchange rates will adjust so that the same basket of goods will cost the same amount in different currencies, reflecting differences in inflation rates. This means that the purchasing power of each currency should equalize over time if inflation rates differ. Interest rate parity (statement A) relates to the relationship between the forward exchange rate and spot exchange rate, not to the comparison with interest rate differences being greater. The International Fisher Effect (statement C) suggests that differences in nominal interest rates between two countries are a reflection of expected inflation differences, not that nominal interest rates should be the same worldwide.

Which of the Following Statements Is True