The Purchasing Power Parity Predicts That If US Price Level

question 10

Multiple Choice

The purchasing power parity predicts that if US price level falls relative to the Mexico price level,then

• A)Dollar value will rise relative to the peso
• B)Dollar value will fall relative to the peso
• C)There is no effect on either currency
• D)PPP predicts price level will normalize in the long-run

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Definitions:

Equilibrium Prices

The market price at which the supply of an item equals the demand for that item, leading to a stable market condition where there is no surplus or shortage.

Stackelberg Model

Oligopoly model in which one firm sets its output before other firms do.

Dominant Strategy

In game theory, a strategy that is the best choice for a player, regardless of what the other players choose.

Reaction Function

In game theory, a strategy that outlines how one player will react to the choices of other players, aiming to maximize their own payoff.