Economics · Foreign Exchange Rate

The Purchasing Power Parity (PPP) theory states which of the following?

Verified Solution4 OptionsUpdated: October 2026👁️1 View

1Exchange rates are determined solely by government intervention and foreign reserve availability
2Exchange rates between currencies are in equilibrium when their purchasing power is identical in both countries✓
3Transaction costs determine the relative value of international currencies regardless of price levels
4Exchange rates adjust so that trade deficits are eliminated immediately

Correct answer

Exchange rates between currencies are in equilibrium when their purchasing power is identical in both countries

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