Which is NOT true about the purchasing-power parity theory?
A) The problem of choosing the appropriate price index exists.
B) It overlooks the influence of capital flows.
C) The government policy may modify exchange rates.
D) It is an infallible guide to exchange rate determination.

Question

Quizplus · Accepted Answer

Purchasing-power parity theory is not infallible and there are several limitations to its application. One such limitation is the problem of choosing an appropriate price index. This theory overlooks the influence of capital flows, and government policies can modify exchange rates.

Which Is NOT True About the Purchasing-Power Parity Theory