One of the most fundamental determinants of the exchange rate is ______________ whereby the exchange rate between the currencies of two countries is in equilibrium
When it equates the prices of a basket of goods and services in both countries.
A) free float
B) free float (dirty)
C) managed float
D) purchasing power parity (PPP)
E) absolute cost advantage

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is the fundamental determinant of exchange rate where the exchange rate between currencies of two countries is in equilibrium when it equates the prices of a basket of goods and services in both countries. Therefore, option D is the correct answer. Option A and B are forms of floating exchange rate, but they do not necessarily determine equilibrium between currencies. Option C is a type of managed exchange rate but does not necessarily ensure equilibrium between currencies. Option E refers to absolute cost advantage which is a concept in international trade theory and is not directly related to determination of exchange rates.

One of the Most Fundamental Determinants of the Exchange Rate