The 'Purchasing Power Parity Theory' of Exchange Rate Determination States

question 106

Multiple Choice

The 'purchasing power parity theory' of exchange rate determination states that:

• A)in the short run, costs of labour are the most important determinant of the exchange rate.
• B)in the long run, a government agency sets the exchange rate between countries to maintain purchasing power.
• C)in the long run, exchange rates will move to equalise the purchasing power of different countries.
• D)in the long run, exchange rates are mainly driven by currency speculators' expectations.

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Definitions:

Inert Substance

A material that does not undergo chemical reactions under set conditions, often used as a control in experiments.

Placebo

A substance with no therapeutic effect, used as a control in testing new drugs.

Correlational Method

A research strategy that examines the extent to which two variables are related, without inferring a causal relationship between them.

Variable Predicts

Indicates how one measured factor can forecast the outcome or changes in another factor, often used in statistical analysis to determine relationships between variables.