The Purchasing Power Parity Theory of Exchange Rate Determination States

question 196

Multiple Choice

The purchasing power parity theory of exchange rate determination states that

• A)in the short run, rates will adjust to parity.
• B)in the long run, the rate reflects differences in price levels between the two countries.
• C)in the long run, a government agency sets the rate at parity.
• D)in the short run, the cost of labor really sets the exchange rate.

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Definitions:

Historical Costs

The original monetary value at which an asset was bought or a liability was incurred.

Liquidation

The process of closing a business, selling its assets, and using the proceeds to pay creditors, with any leftovers distributed to shareholders.

Measurement Base

The method or approach used in determining the value of assets and liabilities for accounting and reporting purposes.

Present Value

The current worth of a future sum of money or stream of cash flows, given a specified rate of return. Present value considers the time value of money.