What is often a key reason for fluctuations in exchange rates according to purchasing power parity?

The correct answer highlights the concept of purchasing power parity (PPP), which posits that in the long term, exchange rates should adjust to reflect the relative price levels of two countries. According to PPP, if one country experiences a higher rate of inflation compared to another, the purchasing power of its currency will decline relative to the currency of the country with lower inflation. As a result, exchange rates fluctuate in response to these differences in price levels since they ultimately influence the cost of goods and services in different countries.

When price levels differ between countries, they create opportunities for arbitrage, leading to adjustments in the exchange rate until the prices of similar goods reflect a parity based on those levels. Thus, this principle establishes a framework for understanding exchange rate movements and ensures that fluctuations align with changes in relative economic conditions.

Other options touch upon factors that can affect exchange rates but do not directly correlate with the theoretical foundation of purchasing power parity. Government intervention can influence currency values through direct market actions, while changes in consumer preferences can shift demand for currencies indirectly. Political stability can also affect exchange rates but is more related to investor confidence rather than price levels directly influencing currency value.