The Purchasing Power Parity Theory Is Not a Good Explanation

question 67

Multiple Choice

The purchasing power parity theory is not a good explanation of how nominal exchange rates are determined in the short run because:

• A)there is no evidence that low inflation is associated with less rapid nominal exchange rate depreciation.
• B)most nominal exchange rates are fixed and foreign exchange markets do not bring the supply and demand for currencies into equilibrium.
• C)most goods and services are traded internationally and are standardized.
• D)many goods and services are not traded internationally and not all internationally-traded goods are standardized.

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Definitions:

Present Value

Present value is a financial concept that calculates the current worth of a future sum of money or stream of cash flows, given a specified rate of return.

Discount Rate

The interest rate used to determine the present value of future cash flows in discounted cash flow analysis; also refers to the interest rate charged by central banks on loans to commercial banks.

Cash Flows

The complete sum of cash inflows and outflows within a corporation, severely impacting its liquidity stance.