Which of the following statements are TRUE regarding the theory of Purch Parity

Question

Which of the following statements are TRUE regarding the theory of Purch Parity (PPP)? CIRCLE ALL THAT APPLY. 6. asing Power (2 points) Exchange rates between any two currencies will adjust to reflect changes in the a. price levels of the two countries. The theory of PPP is an application of the "Law of One Price" to national price levels. The cost of the "market basket" used to measure inflation in one country must be the same as the cost of the "market basket" used to measure inflation in any other country The theory of PPP can be explained through the use of the "real exchange rate" concept, which is the rate at which domestic goods can be exchanged for foreign b. c. d. goods.

Explanation / Answer

ANswer:

Options -

a )

b)

Option c can be rejected as the difference in the costs of the market basket should be reflected in the exchange rates.

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