Question

1. Which of the following is true about relative purchasing power parity?
   1. If two countries have a fixed exchange rate, inflation rates tend to be the same. This means that the two countries’ economies will tend to be closely intertwined.
   2. Changes in expected inflation rates will be reflected in the nominal interest rates on bonds. The higher the expected inflation, the higher the interest rates. This means that countries with higher inflation will tend to see strong demand for domestic bonds.
   3. If two countries have a flexible exchange rate, inflation rates can diverge greatly. A country can therefore be more insulated from foreign inflation with flexible exchange rates.
   4. All of the above true
   5. Only a. and c. are true

Answer 1

a . If two countries have a fixed exchange rate inflation rates tend to be the same.becouse two countries economies will tend to be closely intertwined.

Note: Because it has been asked about the comparison of the purchasing power of two countries,so the auspicious a right