One Reason for the Failure of Purchasing Power Parity Theory

question 93

Multiple Choice

One reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates is due to the

• A) impact of investor psychology on short-run exchange rate movements.
• B) strong relationship between inflation rates and interest rates.
• C) impact of interest rates and short-term exchange rate movements.
• D) strong relationship between interest rate differentials and subsequent changes in spot exchange rates.
• E) government intervention in cross-border trade that violates the assumption of efficient markets.

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