The Purchasing Power Parity Theory Predicts That Changes in the Relative

question 85

Multiple Choice

The purchasing power parity theory predicts that changes in the relative price levels of two countries will affect the exchange rate in such a way that

• A) one unit of a nation's currency will buy more foreign goods than it did before the change in the relative price levels.
• B) one unit of a nation's currency will buy fewer foreign goods than it did before the change in the relative price levels.
• C) one unit of a nation's currency will continue to buy the same amount of foreign goods as it did before the change in the relative price levels.
• D) the percentage of depreciation in one currency equals the percentage of appreciation in the other currency.

---

Definitions:

Majority Rule

A decision-making rule in which policies or choices are decided based on the preference of the majority of participants.

Transitive Preferences

A condition in decision-making where if an individual prefers option A over B, and B over C, then the individual also prefers A over C.

Condorcet

A method of decision making, named after the French mathematician Marquis de Condorcet, that identifies the option that would win a majority of votes in all possible pairings against each of the other options.

Social Choice and Individual Values

A concept in welfare economics and political science that examines how to aggregate individual preferences, values, or welfare to reach collective decisions.