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    Question

    What is the purchasing power parity (PPP) theory

    primarily concerned with?
    A The effect of trade balances on currency values. Correct Answer Incorrect Answer
    B The impact of government policies on currency values. Correct Answer Incorrect Answer
    C Equating the exchange rate to the relative price levels between two countries. Correct Answer Incorrect Answer
    D The relationship between inflation rates and interest rates. Correct Answer Incorrect Answer
    E The role of international debt on currency values. Correct Answer Incorrect Answer

    Solution

    Purchasing power parity (PPP) theory states that the exchange rate between two countries' currencies is in equilibrium when their relative price levels are equivalent to the exchange rate. This theory suggests that goods and services should cost the same in different countries when the prices are converted into the same currency.

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