The Purchasing Power Parity Theory Predicts That Changes in the Relative

question 85

Multiple Choice

The purchasing power parity theory predicts that changes in the relative price levels of two countries will affect the exchange rate in such a way that

• A) one unit of a nation's currency will buy more foreign goods than it did before the change in the relative price levels.
• B) one unit of a nation's currency will buy fewer foreign goods than it did before the change in the relative price levels.
• C) one unit of a nation's currency will continue to buy the same amount of foreign goods as it did before the change in the relative price levels.
• D) the percentage of depreciation in one currency equals the percentage of appreciation in the other currency.