Of the many influences on exchange rates mentioned in International Finance, one factor is considered to...

      

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Of the many influences on exchange rates mentioned in International Finance, one factor is considered to be particularly important for explaining currency movements over the long run. That factor is inflation. In International finance we examine the theory and the evidence for a long-run connection between inflation and exchange rates. This connection has become known as the purchasing-power parity (PPP) principle. Required; Explain how you could determine whether PPP exists. Describe a limitation in testing whether PPP holds. Of the many influences on exchange rates mentioned in International Finance, one factor is considered to be particularly important for explaining currency movements over the long run. That factor is inflation. In International finance we examine the theory and the evidence for a long-run connection between inflation and exchange rates. This connection has become known as the purchasing-power parity (PPP) principle. Required; Explain how you could determine whether PPP exists. Describe a limitation in testing whether PPP holds.

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To determine whether purchasingpower parity PPP exists one approach is to compare the inflation rates between two countries and observe their impact o... View the full answer