Question

What is purchasing power parity? Why would a government want to keep its currency undervalued? What transactions does a central bank need to do to keep its currency undervalued?

Answer 1

Answer- Purchasing power parity- Purchasing power parity is a economic theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the countries.

A government want to keep it's currency undervalued because it makes their exports less expensive. When a country exports more , it earns more which means more income for the economy

central bank intervention is an act to keep it's currency undervalued. Under this a central bank buys and sells one or more currencies in order to affect the exchange rate of its own currency. If a central bank want to keep it's currency undervalued, then it may buys currency from the open market to decrease supply.