When PPP Does Not Hold in the Short Run, Economists

question 45

Multiple Choice

When PPP does not hold in the short run, economists have developed an alternative short-run explanatory theory based on the idea that:

• A) currency values are different from other prices, since currencies are not considered assets.
• B) currency values are influenced in the short run because they serve as short-term assets.
• C) currency values will eventually result in PPP over time, so no short-run theory is needed.
• D) currency values are set by government entities and the IMF so the value often does not result in PPP.

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Definitions:

Marginal Cost

The cost added by producing one additional unit of a product or service.

Kink

A sudden change in the rate or direction of a curve or line, often used in economics to describe a sharp change in a demand or supply curve.

Kinked Demand Curve

A demand curve that has a distinct bend or kink, typically used in oligopoly models, suggesting that a firm will face different elasticities for price increases versus price decreases.

Lower Prices

A decrease in the cost of goods or services, often resulting in increased demand or consumer purchasing power.