The Purchasing Power Parity Theory Is a Reasonably Good Explanation

question 72

Multiple Choice

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination

• A) in the short run.
• B) in the long run,between countries with very different inflation rates.
• C) when there are significant volumes of non-traded goods and services.
• D) for international trade in non-standardized goods and services.
• E) when there are fixed exchange rates.

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Definitions:

Long Run Adjustment

The process through which firms adjust their levels of production, capital, and other inputs to reach a new equilibrium in response to changes in market conditions over time.

Organic

Refers to products, especially food or farming methods, that are produced or conducted without the use of synthetic chemicals, fertilizers, or genetically modified organisms.

Profit

The financial gain realized when the amount of revenue gained exceeds the expenses, costs, and taxes involved in sustaining the activity in question.

Long Run Equilibrium

A state in an economy in which all factors of production and inputs can be varied, allowing firms to make adjustments and leading to the normalization of prices and output.