07 January 2014
The exchange rate of two currencies of two countries represents the relative purchasing power of those countries. For example, if a basket of goods costs GBP 1 in U K and the same basket of goods costs INR 90 in India, then the exchange rate of the two currencies is shown as GBP 1 = INR 90. This theory suggests that the changes in the rates of inflation of respective countries is the reason for changes in exchange rates implying if inflation rates of two countries continues to be same, then the exchange rate between the currencies of those countries will also remain same.
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