The theory of _____ states that changes in the exchange rate reflect only changes in the price levels of two countries.

A) floating exchange rate
B) fixed exchange rate
C) flexible exchange rate
D) purchasing power parity
E) managed exchange rate

Purchasing Power Parity

A theory in economics that compares different countries' currencies through a "basket of goods" approach, aiming to determine the relative value of two currencies.

Exchange Rate

The value of one currency for the purpose of conversion to another, determining how much of currency A is needed to purchase a unit of currency B.

Price Levels

A measure reflecting the average cost of a basket of goods and services in an economy, influencing the cost of living and economic health.