The Purchasing Power Parity Theory

question 46

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 short run so that the price level is equal to the exchange rate 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 higher than that of the rest of the world.

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Definitions:

Accrual-Basis Accounting

Accounting basis in which companies record transactions that change a company's financial statements in the periods in which the events occur.

Cash-Basis Accounting

Accounting basis in which companies record revenue when they receive cash and an expense when they pay out cash.

Revenue Recognition Principle

An accounting principle stating that revenue should be recorded when it is earned and realizable, regardless of when the cash is received.

Expense Recognition Principle

An accounting principle that states expenses should be recognized and recorded when they are incurred, regardless of the timing of cash payments.