Banking · Foreign Exchange
Which fundamental principle of foreign exchange states that the equilibrium exchange rate between two currencies should adjust to reflect the difference in their respective domestic inflation rates, ensuring a basket of goods costs the same in both countries?
- 1Covered Interest Parity (CIP)
- 2Fisher Effect
- 3Purchasing Power Parity (PPP)✓
- 4Law of One Price (LOOP)
Correct answer
Purchasing Power Parity (PPP)
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