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:

Supplier

An entity, individual, or company that provides products or services to another entity or individual typically in a supply chain context.

Income

Proceeds that come in, particularly at consistent intervals, from occupational or investment sources.

Utility Function

A mathematical representation that captures the preference ranking of various bundles of goods by an individual, translating these preferences into a level of utility or satisfaction.

Income

Refers to the money received, typically on a regular basis, for work or through investments.