Multiple choice

Many times we read in newspapers that the Rupee is appreciating. When we consider the rupee-dollar exchange rate in the light of Purchasing Power Parity (PPP) we think that the exchange rate of the two currencies should be�

  1. Equal to the ratio of price levels in the two countries

  2. Not be equal to the ratio of price levels in the two countries

  3. Decided on the basis of the value of the third major currency i.e. Euro or Yen

  4. Necessarily be different for both the currencies as the economies of both of them are driven on two different sets of variables and it has no relation with PPP

  5. None of these
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A Correct answer
Explanation

Purchasing Power Parity (PPP) theory states that the exchange rate between two currencies should be equal to the ratio of the price levels of the two countries, effectively equalizing the purchasing power of the currencies.

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