The Purchasing Power Parity Theory Is Not a Good Explanation

question 75

Multiple Choice

The purchasing power parity theory is not a good explanation of nominal exchange rate determination 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:

Receivables

Funds that are owed to a company by its customers or clients for goods or services already delivered.

Payables

Short-term liabilities of a company, representing amounts owed to suppliers or creditors for goods and services received but not yet paid for.

Control Accounts

General Ledger accounts that summarize the balances of numerous subsidiary accounts, used to consolidate and reconcile details.

Computerized Accounting System

An accounting system that utilizes software to record, store, and process financial transactions and data.