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Asked by Rounak Munoyat on Jun 23, 2024

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Purchasing power parity can best be defined as:

A) An agreement to trade currencies based on the exchange rate today for settlement in two days.
B) The exchange rate used on trading currencies.
C) An agreement to exchange currency at some time in the future.
D) The agreed upon exchange rate to be used in a forward trade.
E) The idea that the exchange rate adjusts to keep purchasing power constant among currencies.

Purchasing Power Parity

Purchasing power parity is an economic theory that compares different countries' currencies through a "basket of goods" approach, assuming that exchange rates should adjust so that identical goods cost the same in different countries.

Exchange Rate

The price of one country's currency expressed in terms of another country's currency, facilitating international trade and finance.

  • Familiarize oneself with the theory of purchasing power parity (PPP) and its influence on the fluctuation of exchange values.
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Rachel SchechterJun 25, 2024
Final Answer :
E
Explanation :
Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency.

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