The Theory of PPP Suggests That If One Country's Price

question 91

Multiple Choice

The theory of PPP suggests that if one country's price level falls relative to another's,its currency should

• A)depreciate.
• B)appreciate.
• C)float.
• D)do none of the above.

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Definitions:

Exchange Rate Risk

The potential for investors or companies to experience losses due to fluctuations in the exchange rates between currencies.

Net Present Value

A calculation that compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account; used in capital budgeting to analyze the profitability of an investment or project.

Forward Exchange Rate

The exchange rate at which two parties agree to exchange currencies at a future date.

Forward Trade

A non-standardized contract between two parties to buy or sell an asset at a specified future date for a price that is agreed upon today.