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    Question

    The theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries, is 

    A The Equilibrium Theory Correct Answer Incorrect Answer
    B The Price Theory Correct Answer Incorrect Answer
    C Purchasing Power Parity Correct Answer Incorrect Answer
    D The Theory of Differential Pricing Correct Answer Incorrect Answer
    E None of these Correct Answer Incorrect Answer

    Solution

    The alternative to using market exchange rates is to use purchasing power parities (PPPs). The purchasing power of a currency refers to the quantity of the currency needed to purchase a given unit of a good, or common basket of goods and services.

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