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    Question

    The theory of purchasing power parity says that

           .
    A the inflation rates in two countries are unrelated Correct Answer Incorrect Answer
    B the exchange rate reflects the inflation rate difference between two countries in the opposite direction Correct Answer Incorrect Answer
    C the inflation rate is greater than the interest rate Correct Answer Incorrect Answer
    D the interest rate is greater than the inflation rate Correct Answer Incorrect Answer
    E the interest rate and the inflation rate are identical Correct Answer Incorrect Answer

    Solution

    PPPs are the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. The theory says that the exchange rate reflects the inflation rate difference between two countries in the opposite direction.

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