Purchasing Power Parity Does Not Hold Up as Well in the Short

question 33

Multiple Choice

Purchasing power parity does not hold up as well in the short run as it does in the long run because

• A) prices are fixed in the short run and the resulting inflexibility is hard to describe theoretically.
• B) substitution among similar goods is nearly impossible when an international transaction is involved.
• C) goods arbitrage is not an instantaneous, costless process.
• D) its conclusions are drawn from price stability, a long-term phenomenon.
• E) all of the above.

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Definitions:

Inelastic Demand

A situation in which demand for a good or service is barely affected by changes in price.

Elastic Demand

When consumer demand for a product significantly rises or falls following a small change in its price.

Price Discrimination

The practice of selling the same product to different buyers at different prices, based on factors other than cost.

Consumer Surplus

The difference between the total amount consumers are willing to pay for a good or service and the actual amount they pay.