The Empirical Evidence on Purchasing Power Parity Seems to Point

question 60

Multiple Choice

The empirical evidence on purchasing power parity seems to point out that:

• A) purchasing power parity can explain long run movements in exchange rates but does not hold up to scrutiny for short-run changes.
• B) purchasing power parity does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run.
• C) purchasing power parity is a good theory for international trade, but is of little use in explaining exchange rate movements.
• D) inflation and a country's rate of currency appreciation are positively correlated.

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Definitions:

Average Variable Cost

The total variable cost per unit of output, calculated by dividing total variable costs by the quantity of output produced.

Profit Maximization

The method used by a company to establish the price and quantity of production that generates the maximum profit.

Lowest Output

The minimum amount of goods or services produced by an entity under given conditions.

Shut Down

A short-term decision by a firm to cease operations because current operation is not covering variable costs.