The theory of purchasing power parity A. assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. B. extends the law of one price to a group of goods.

The correct answer is letter "B": extends the law of one price to a group of goods.

Explanation:

Purchasing Power Parity or PPP compares different country's currencies through a market basket of goods approach. Two currencies are in PPP when a market basket of goods, taking into account the exchange rate, is priced the same in both countries.

The Law of one price states that individual and identical goods or services will have the same price if there were no friction between global markets. Thus, the PPP approach would be the extent of the law of one price adding the exchange rates.

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