Question

2. One of the most fundamental determinants of the exchange rate is ______________ whereby the exchange rate between the currencies of two countries is in equilibrium when it equates the prices of a basket of goods and services in both countries.

Answer 1

Answer: PURCHASING POWER PARITY.

Explanation: Purchasing power is defined as the amount of goods and services that can be bought with a unit of currency.

PURCHASING POWER PARITY refers to a theory of long-term equilibrium exchange rates based on relative price levels of two countries.

Exchange rates is determined by a whole number of factors some of which include; Differentials in Inflation; Differentials in Interest Rates; Current Account Deficits; Public Debt;etc.