Explanation:

Relative purchasing power parity (PPP) states that the percentage change in the spot exchange rate between two currencies over a period should equal the difference between the inflation rates of the two countries during that period.

Mathematically: %ΔS = π_foreign - π_domestic

Where:

• %ΔS = percentage change in spot exchange rate (foreign currency per domestic currency)
• π_foreign = foreign inflation rate
• π_domestic = domestic inflation rate

This differs from:

• International Fisher effect: Relates interest rate differentials to expected exchange rate changes
• Absolute PPP: States that exchange rates should equal the ratio of price levels between countries

Relative PPP is the correct answer as it directly relates inflation differentials to exchange rate movements.