Question

If foreign exchange markets are efficient, then the relative purchasing power parity condition must hold true. Select one: a. FALSE b. TRUE

Answer 1

if foreign exchange markets are efficient than the relative purchasing power parity conditions holds true , because theory states that an ideally efficient market, identical goods should have only one price.

The Purchasing Power Parity concept is based on the law of one price, where in the absence of transaction costs and official trade barriers, identical goods will have the same price in different markets when the prices are expressed in the same currency.