The Purchasing Power Parity Theory

question 163

Multiple Choice

The purchasing power parity theory

• A)is more a predictor of a long-run tendency than of the day-to-day relationship between changes in the price level and the exchange rate
• B)predicts that exchange rates between two currencies will adjust in the long run to reflect the price level difference between two countries
• C)is more a predictor of a short-run phenomenon than of a long-run relationship between the price level and the exchange rate between two countries
• D)is helpful in explaining long-run trends, even though trade barriers and central bank intervention may hinder the usefulness of the theory
• E)tells us that a country's currency generally will appreciate if its inflation rate is lower than that of the rest of the world

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