The Purchasing Power Parity Theory Is Not a Good Explanation

question 48

Multiple Choice

The purchasing power parity theory is not a good explanation of nominal exchange rate determination in the short run because:

• A)there is no evidence that low inflation is associated with less rapid nominal exchange rate depreciation.
• B)most nominal exchange rates are fixed and foreign exchange markets do not bring the supply and demand for currencies into equilibrium.
• C)most goods and services are traded internationally and are standardized.
• D)many goods and services are not traded internationally and not all internationally-traded goods are standardizeD.

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Definitions:

Liabilities

Financial obligations or debts owed by a business to outside parties, which must be settled over time through the transfer of economic benefits.

Equity Section

Part of a company's balance sheet that represents the owners' share of the corporation, including retained earnings and issued stock.

Profit & Loss Statement

A financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, typically a fiscal quarter or year.

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