If the purchasing-power parity theory is true, then:
A) the net exports schedule is very steep.
B) all changes in the real exchange rate result from changes in price levels.
C) all changes in the nominal exchange rate result from changes in price levels.
D) changes in saving or investment influence only the real exchange rate.

Question

Quizplus · Accepted Answer

The purchasing-power parity theory suggests that changes in the nominal exchange rate between two currencies are determined by changes in the price levels between the two countries. This theory implies that the exchange rate adjusts to equalize the purchasing power of different currencies.

If the Purchasing-Power Parity Theory Is True, Then