Purchasing power parity is a good theory of explaining exchange rate behavior:
A) over very short periods.
B) over periods lasting six to twelve months.
C) over very long periods, such as decades.
D) over both long and short periods.

Question

Quizplus · Accepted Answer

Purchasing power parity theory suggests that over very long periods of time, exchange rates will adjust to equalize the purchasing power of different currencies. This is because exchange rates that are misaligned from their PPP values will lead to arbitrage opportunities, which in turn will lead to changes in demand and supply that will bring the exchange rate back to its PPP value. However, over short and medium-term periods, PPP may not hold due to factors such as differences in inflation rates and speculative behavior.

Purchasing Power Parity Is a Good Theory of Explaining Exchange