Asked by Krista McGonigle on Jul 24, 2024
Verified
The purchasing-power-parity theory holds that exchange rates should equalize the inflation rates among the trading nations.
Purchasing-Power-Parity Theory
The idea that if countries have flexible exchange rates (rather than fixed exchange rates), the exchange rates between national currencies will adjust to equate the purchasing power of various currencies. In particular, the exchange rate between any two national currencies will adjust to reflect the price-level differences between the two countries.
Inflation Rates
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
- Acquire knowledge on how inflation rates influence foreign exchange markets and the value of currencies.
- Relate economic growth rates to changes in trade balances and currency values.
Verified Answer
PG
Prakhar GuptaJul 29, 2024
Final Answer :
False
Explanation :
The purchasing-power-parity (PPP) theory holds that exchange rates should adjust to equalize the price of identical goods and services between two countries, not necessarily to equalize inflation rates among trading nations.
Learning Objectives
- Acquire knowledge on how inflation rates influence foreign exchange markets and the value of currencies.
- Relate economic growth rates to changes in trade balances and currency values.