Question

In the long run, what does Purchasing Power Parity (PPP) state about exchange rates?

Options

• Exchange rates reflect differences in price levels between countries

• Exchange rates are fixed by the International Monetary Fund (IMF)

• Exchange rates are fixed in terms of gold

• Exchange rates always rise with higher domestic interest rates

Answer 1

Purchasing Power Parity (PPP) relates exchange rates to price levels between countries in the long run. Differences in domestic and foreign prices are reflected in the exchange rate.