Purchasing Power Parity Is the Theory That Nominal Exchange Rates

question 57

Multiple Choice

Purchasing power parity is the theory that nominal exchange rates are determined:

• A)by the forces of supply and demand.
• B)by real exchange rates.
• C)as necessary to achieve the fundamental value of the exchange rate.
• D)as necessary for the law of one price to holD.

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Definitions:

Gross Method

An accounting practice where purchases are recorded at the total invoice cost without deducting any purchase discounts.

Net Method

An accounting approach where discounts for early payment are assumed to be taken and thus are deducted from the cost of purchases.

Accounts Payable

Short-term liabilities representing amounts owed to suppliers or creditors for goods and services received.

Non-Interest-Bearing Note

A promissory note with no interest charged on the principal; repaid at its face value at maturity.