When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency, it is said the Law of prevails. Currency demand Currency supply Purchasing power parity One Price Understanding the theory of purchasing power parity is important because deviations from PPP significantly affect the. profitability of multinational firms operations of the central bank arbitrage opportunities in the banking markets hedging activities of multinational firms One important reason to study the purchasing power parity theory is because .opportunities forecasting exchange rates is difficult and PPP makes it easier when inflation rates differ across international borders, PPP provides a baseline forecast of future exchange rates investors should borrow in a foreign currency, when there is a forward discount it provides currency dealers with a way to identify arbitrage The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the. Absolute purchasing power parity Relative purchasing power parity Real exchange rate equilibrium Equilibrium purchasing power parity What is the name of the ratio of a price level at one point in time to the price level in a designated base year? bid-ask spread price index reserve requirement percent spread