Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?

Question

Quizplus · Accepted Answer

The theory that suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries is purchasing power parity (PPP). Triangular arbitrage involves exploiting pricing discrepancies in the foreign exchange market, while the international Fisher effect (IFE) states that the nominal interest rate differential between two countries equals the expected percentage change in the exchange rate over the same period. Interest rate parity (IRP) suggests that the difference in interest rates between two countries should reflect the expected change in exchange rates.

Which of the Following Theories Suggests That the Percentage Change