________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

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This question asks about which theory states that differential inflation rates between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.
Option A: The Fisher Effect. The Fisher effect relates nominal interest rates, real interest rates, and expected inflation, not directly to exchange rate adjustments in response to relative inflation differentials. It does not describe how spot exchange rates move to offset inflation differences between countries.
Option B: The International Fisher Effect. The IFE extends the Fisher principle to the international arena, linking interest rate differentials to expected changes in exchange rates. However, it focuses on interest rates and expected depreciation/appreciation, not specifically on differential inflation rates being offset by spot exchange rate changes.
Option C: Absolute Purchasing Power Parity. Absolute PPP posits that price levels across countries should be equal when measured in a common currency, implying a level of price equality given exchange rates. It does not describe the adjustment mechanism where differential inflation across countries is offset by changes in the exchange rate over time.
Option D: Relative Purchasing Power Parity. PPP in its relative form states that the rate of change in exchange rates between two countries over time should offset the difference in inflation rates between those two countries. In other words, if country A experiences higher inflation than country B, the currency of country A should depreciate relative to country B to offset the inflation differential. This matches the description given in the question, as it specifically addresses differential inflation and the corresponding exchange rate adjustment.
Therefore, the statement corresponds to Relative Purchasing Power Parity, making option D the correct choice. The other options either address related but distinct concepts (Fisher effects) or describe different PPP formulations (absolute PPP) or international monetary relationships (IFE) that do not precisely capture the stated offset mechanism between inflation differentials and spot exchange rate changes.

________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

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