Understanding Purchasing Power Parity

Very Easy Currency Exchange Rates Exchange Rate Models

Exchange rate models are essential for understanding how currencies are valued against each other. One of the most straightforward approaches to explaining exchange rate movements is the Purchasing Power Parity (PPP) theory. According to this model, exchange rates between two currencies should adjust to reflect changes in price levels due to inflation over time.

Which of the following statements best describes the concept of Purchasing Power Parity?

PPP asserts that in the long run, exchange rates will adjust to equalize the price of identical goods in different countries.

PPP indicates that interest rates will determine the future value of currency exchange rates.

PPP is based on the assumption that the balance of trade primarily influences exchange rate movements.

Hint

Submitted8.4K

Correct7.2K

% Correct85%