The Purchasing Power Parity Theory of Exchange Rate Determination States

question 196

Multiple Choice

The purchasing power parity theory of exchange rate determination states that

• A)in the short run, rates will adjust to parity.
• B)in the long run, the rate reflects differences in price levels between the two countries.
• C)in the long run, a government agency sets the rate at parity.
• D)in the short run, the cost of labor really sets the exchange rate.

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Definitions:

Federal Reserve Board Of Governors

The governing body of the Federal Reserve System, responsible for overseeing the Federal Reserve banks and setting monetary policy.

Commodity Money

Currency that possesses inherent worth and serves functions beyond simply facilitating trade, like gold or silver.

Monetary Policy

The process by which a central bank controls the supply of money in an economy, primarily through interest rates, to maintain price stability and achieve high employment.

100-Percent-Reserve Banking

A banking system where banks are required to keep the full amount of each depositor's funds in reserve, meaning they cannot lend out any of the money deposited.