The Purchasing Power Parity Theory

question 46

Multiple Choice

The purchasing power parity theory:

• A)is more a predictor of a long-run tendency than of the day-to-day relationship between changes in the price level and the exchange rate.
• B)predicts that exchange rates between two currencies will adjust in the short run so that the price level is equal to the exchange rate between two countries.
• C)is more a predictor of a short-run phenomenon than of a long-run relationship between the price level and the exchange rate between two countries.
• D)is helpful in explaining long-run trends,even though trade barriers and central bank intervention may hinder the usefulness of the theory.
• E)tells us that a country's currency generally will appreciate if its inflation rate is higher than that of the rest of the world.