Question

In a two-country world, absolute Purchasing Power Parity (PP

  • P holds if: P = E × P* If relative PPP holds, which of the following statements MUST be true?
A The nominal exchange rate E must remain constant over time
B The percentage change in the nominal exchange rate equals the differential between domestic and foreign inflation rates
C The real exchange rate fluctuates constantly due to non-tradeable goods
D Domestic and foreign price levels P and P* must be strictly identical
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