The 'Purchasing Power Parity Theory' of Exchange Rate Determination States

question 106

Multiple Choice

The 'purchasing power parity theory' of exchange rate determination states that:

• A)in the short run, costs of labour are the most important determinant of the exchange rate.
• B)in the long run, a government agency sets the exchange rate between countries to maintain purchasing power.
• C)in the long run, exchange rates will move to equalise the purchasing power of different countries.
• D)in the long run, exchange rates are mainly driven by currency speculators' expectations.

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Definitions:

Productivity

The efficiency with which an organization or individual converts inputs into outputs, often measured as the amount of goods or services produced per unit of input.

Social Setting

The physical and social context in which people live, work, or interact, influencing their behavior, interactions, and perceptions.

Illumination

The provision of light, making something visible or brightened, or the process of clarifying and making something understood.

Productivity

The measure of how efficiently resources are used to produce goods and services.