Question

According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?

1) Exchange rate
2) Inflation rate
3) Interest rate
4) Gross domestic product

Answer 1

According to purchasing-power parity, the ratio of the foreign price level divided by the domestic price level equals the exchange rate.

Step-by-step explanation:

The ratio of the foreign price level divided by the domestic price level equals the purchasing-power parity (PPP) exchange rate. Therefore, the correct answer is 1) Exchange rate.

Purchasing power parity is a theory that suggests that exchange rates should adjust to ensure that a given amount of currency has the same purchasing power across different countries. This means that if goods are cheaper in one country compared to another, the exchange rate should reflect that difference in prices.