The Purchasing Power Parity (PPP)theory Best Predicts Exchange Rate Changes

question 72

Multiple Choice

The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with

• A)appreciating currencies.
• B)stable currencies.
• C)underdeveloped capital markets.
• D)small differentials in inflation rates.
• E)industrialized economies.

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Definitions:

Production Possibilities Curve

A graphical representation showing the maximum combination of goods or services that can be produced with a fixed amount of resources.

Opportunity Cost

The price paid for not selecting the immediate alternative choice while deciding.

Production Possibilities Curve

A graphical representation showing the maximum combinations of goods or services an economy can produce given its resources and technology.

Opportunity Cost

The cost of foregoing the next best alternative when making a decision.