Which of the Following Is a Drawback of the Purchasing

question 54

Multiple Choice

Which of the following is a drawback of the purchasing power parity theory?

• A)It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years.
• B)It does not explain change in exchange rates in terms of change in relative prices.
• C)It cannot explain when the demand of a particular currency would exceed its supply and vice versa.
• D)It does not address inflation in situations where governments control the rate of growth in money supply.
• E)It cannot predict exchange rate changes for countries with high rates of inflation and underdeveloped capital markets.

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Definitions:

Interest Rate

The cost of borrowing money or the return on saved or invested money, expressed as a percentage of the principal.

Saving and Investment

The act of setting aside income for future use and allocating it to instruments expected to generate returns over time

Nominal-Wage Rigidity

The situation where nominal wages are slow to adjust to changing economic conditions, affecting employment and economic dynamics.

Classical Self-Correction Mechanism

A theory suggesting that free markets are capable of automatically adjusting to and correcting economic imbalances.