The Purchasing Power Parity Theory Is a Good Predictor of

question 18

Multiple Choice

The purchasing power parity theory is a good predictor of

• A)all of the following
• B)the long-run tendencies between changes in the price level and the exchange rate of two countries
• C)interest rate differentials between two countries when there are strong barriers preventing trade between the two countries
• D)how intervention in exchange markets by central banks influences prices in various countries
• E)the day-to-day relationship between changes in the price level and the exchange rate of two countries

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Definitions:

Convex Preferences

In microeconomics, a condition where consumers prefer a mix of goods over having only one good, illustrated by a convex shape of their indifference curves.

Centered

In a general context, it means being in the middle or at the heart of something; in mathematics, it can refer to the process of adjusting data points or a distribution so that its mean equals zero.

Convex Preferences

Refers to a situation in economics where a consumer prefers a mix or combination of goods over having all of one good, demonstrating a desire for diversity in consumption.

Exchange

The act of giving one thing and receiving another in return, particularly in reference to goods, services, or currencies.