Question

The empirical data on real exchange rates shows that the relative purchasing power parity (PPP) hypothesis

a. always holds.

b. generally does not hold.

c. holds in advanced countries.

d. holds among countries that share a common currency.

Answer 1

Answer- Correct option is 'd'

The empirical data on real exchange rates shows that the relative purchasing power parity (PPP) hypothesis holds among countries that share a common currency. Purchasing Power Parity theory that holds that the nominal exchange rates between two countries should be equal to the ratio of aggregate price level between two countries, so that a unit of one currency of one country will have the same purchasing power in a foreign country. The idea that the purchasing power parity may hold because of international goods arbitrage is related to the Law of One Price.