The Purchasing Power Parity Theory (PPP) of the Exchange Rate

question 28

Multiple Choice

The purchasing power parity theory (PPP) of the exchange rate holds that if is the nominal exchange rate, P is the domestic price level and Pf is the foreign price level, then

• A) if Pf grows faster than P the nominal exchange rate appreciates.
• B) = Pf/P.
• C) the real exchange rate is constant.
• D) all of the above.