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    Question

    The theory that states the exchange rate between two

    currencies is determined by the relative price levels in the two countries is the:
    A Interest Rate Parity Correct Answer Incorrect Answer
    B Purchasing Power Parity (PPP) Correct Answer Incorrect Answer
    C International Fisher Effect Correct Answer Incorrect Answer
    D Balance of Payments Theory Correct Answer Incorrect Answer

    Solution

    Purchasing Power Parity (PPP) theory suggests that in the long run, exchange rates should adjust to equalize the price of an identical basket of goods and services in any two countries.

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