The Purchasing Power Parity Theory Predicts That Changes in the Relative

question 85

Multiple Choice

The purchasing power parity theory predicts that changes in the relative price levels of two countries will affect the exchange rate in such a way that

• A) one unit of a nation's currency will buy more foreign goods than it did before the change in the relative price levels.
• B) one unit of a nation's currency will buy fewer foreign goods than it did before the change in the relative price levels.
• C) one unit of a nation's currency will continue to buy the same amount of foreign goods as it did before the change in the relative price levels.
• D) the percentage of depreciation in one currency equals the percentage of appreciation in the other currency.

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Definitions:

Moral Hazard

The risk that one party to a contract can change their behavior to the detriment of another party, knowing that they won't have to bear the full consequences of their actions.

Piece-rate Garment Worker

A worker in the garment industry who is paid for each piece produced, rather than receiving an hourly wage.

Hourly Salesman

A salesperson who is compensated based on the number of hours worked, rather than commission on sales made.

Moral Hazard

A situation where one party is inclined to take risks because the negative consequences of the risk will be borne by another party.