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Purchasing Power Parity (PPP) suggests that the exchange rate adjusts to:
AEquate nominal interest rates across countries
BEquate the cost of identical baskets across currencies
CEquate trade balances across borders
DEquate real GDP per capita across nations
Answer & Solution
Correct answer: B. Equate the cost of identical baskets across currencies
1. Identify what the question asks: this concept maps to ppp (§8.2).
2. Apply the framework or formula relevant to the topic.
3. Eliminate distractors and arrive at the correct option (B).
_Source: ICAI BoS CA Final Paper 2, Ch 10 "Foreign Exchange Exposure and Risk Management"_
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