00:01
Hello students, here is a question, if purchasing power party holds together with a interest rate party, so we have an options given here, the first is real interest rate will be equal across two countries.
00:13
Real interest rate is equal to real interest rate will be equal across will be equal across the two countries and the second option is real exchange rate, real exchange rates are rates will be equal across two countries and the third option is inflation rate will be equal, inflation rates will be equal, equal across two countries.
01:07
So, these are the options we have, let us discuss the answer now.
01:11
So, first purchasing power party ppp states that the exchange rate between two currencies should adjust to equalize the price of a basket of goods and services in both the countries.
01:21
So, this means ppp holds the exchange rate should reflect on the relative purchase power of two currency, the second interest rate is irp which states the differences in the interest rate between two countries should be equal to expected changes in the expected rate of exchange rate after return between two countries.
01:38
So, this means that irp holds the interest rate difference should reflect the expected change in the expected rate.
01:45
So, now if both ppp and irp holds, we can conclude that real interest rate will be equal across two countries because, so this is the right answer because the ppp holds the exchange rate should reflect the relative purchase power of two countries.
02:02
So, the irp holds the interest rate difference should be reflecting the changes in the exchange rate...