Q. Consider the following statements regarding the Rupee Dollar exchange rate in the light of purchasing power parity PPP:
- Exchange rate of the currencies should be equal to the ratio of price levels in two countries
- Exchange rate of the currencies should be not equal to the ratio of price levels in the two countries
- Exchange rate of the currencies should be decided on the basis of value of the third major currency like euro
which among the above statements are correct ?
Answer:
1 only is correct
Notes: As per the Purchasing power parity (PPP) is a theory, the exchange rate between two countries should equal the ratio of the price level of a fixed basket of goods and services of the two countries.