Which of the following is a feature of the 'Purchasing Power Parity' theory in its absolute form?
A. The exchange rate between two currencies equals the ratio of the countries’ price levels
B. Only relative changes in prices matter
C. Exchange rates are determined only by trade balances
D. The exchange rate equals the interest differential
Answer: Option A
Solution (By JKSSB Mock Tests)
Absolute purchasing power parity states that the nominal exchange rate should equal the ratio of the domestic to the foreign price level so that a basket of goods costs the same in both countries.
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