Exchange rate changes tend to reflect internationaldifferences in inflation rate

Question

Exchange rate changes tend to reflect internationaldifferences in inflation rates. What is the name of thistheory?
a. The purchasing power parity theory. b. The IMF effect. c. Interest rate parity theory. d. The law of one price. e. None of the above. Exchange rate changes tend to reflect internationaldifferences in inflation rates. What is the name of thistheory?
a. The purchasing power parity theory. b. The IMF effect. c. Interest rate parity theory. d. The law of one price. e. None of the above.

Explanation / Answer

The Purchasing Power Parity (PPP) states that in the long runexchange rates will change in line with different inflation ratesbetween countries. Answer is Option (a) The Purchasing Power ParityTheory.

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