Question #6
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 2
Status: Unattempted
Question
Which of the following statements regarding purchasing power parity (PPP) is least accurate?
Answer Choices:
A. Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level
B. Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good
C. Relative PPP states that prices for goods and services are the same whether it is for one good or for a basket of goods
Explanation
Relative PPP does not state that prices for goods and services are the same, only that the
rate of change in the FX rate is a function of the inflation differentials between the two
countries.