Understanding Purchasing Power Parity (PPP)

Very Easy Currency Exchange Rates Parity Conditions

In the context of international finance, parity conditions refer to the theoretical relationships that determine exchange rates between currencies. The most commonly discussed parity conditions include the Purchasing Power Parity (PPP) and Interest Rate Parity (IRP). Understanding these conditions is crucial for evaluating currency fluctuations.

Considering the Purchasing Power Parity (PPP) theory, which of the following statements correctly describes this relationship?

PPP suggests that in the long run, exchange rates will adjust to equalize the price of the same basket of goods across different countries.

PPP states that exchange rates are determined purely by interest rates without consideration of inflation.

PPP implies that economic growth rates directly influence exchange rate movements without any other factors.

Hint

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