Answer: Relative purchasing power parity

**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.

Author: LeetQuiz Editorial Team