According to the Purchasing Power Parity, if one country's price level rises relative to another's by a certain percentage, then the other country's currency appreciates by the same percentage. maintains its value. depreciates by the same percentage. lose its value.

Question

Brent Nash

Business

19 January, 00:19

According to the Purchasing Power Parity, if one country's price level rises relative to another's by a certain percentage, then the other country's currency appreciates by the same percentage. maintains its value. depreciates by the same percentage. lose its value.

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Answers (1)

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Natalya Huff · Answer 1

The correct answer is: appreciates by the same percentage.

Explanation:

According to the purchasing power parity theory, the value of the currency of the two countries is compared on the basis of a basket of goods. If the basket of goods costs the same in both the countries then the currencies are said to be in equilibrium or at par.

If the price level increase in a country, it means that the basket of goods became expensive in that country by the same percentage as an increase in the price level.

So the value of the currency of the other country will appreciate the same percentage as the price rise.