Asked by Eveleen Zapata on Jun 23, 2024
Verified
According to the purchasing power parity theory of exchange rates,
A) a dollar, when converted to other currencies at the prevailing floating exchange rate, has the same purchasing power in various countries.
B) in equilibrium, national currencies have equal value in terms of gold.
C) the higher a nation's price level in terms of its own currency, the greater is the amount of foreign exchange it can obtain for a unit of its currency.
D) nominal currency values will tend to equalize (become 1 = 1) in the long run.
Purchasing Power Parity Theory
An economic theory that compares different countries' currencies through a "basket of goods" approach to determine relative currency values.
Exchange Rates
The value of one currency expressed in terms of another currency, used in international trade and investment.
Nominal Currency Values
The face value of currency without taking into account inflation or the purchasing power of the currency.
- Comprehend the idea of purchasing power parity and its significance in establishing exchange rates.
Verified Answer
5F
5sosfan fics1996Jun 23, 2024
Final Answer :
A
Explanation :
Purchasing power parity (PPP) theory states that in the long run, exchange rates should adjust so that an identical good in two different countries will have the same price when expressed in a common currency. This implies that a dollar, when converted to other currencies at the prevailing exchange rates, should buy the same basket of goods in any country.
Learning Objectives
- Comprehend the idea of purchasing power parity and its significance in establishing exchange rates.