Purchasing power parity means all of the following except:
A)After full adjustment among all currencies, one currency will purchase the same market basket of goods and services in every country.
B)In the long run, exchange rates adjust so that the relative purchasing power of various currencies is equalized.
C)The dollar should appreciate or depreciate by the amount of inflation in one country relative to the United States, thus leaving the relative purchasing power between the dollar and the foreign currency unchanged.
D)The theory of purchasing power parity is based on many very realistic assumptions and thus can be relied upon to correctly forecast long run changes in exchange rates between two countries.

Question

Quizplus · Accepted Answer

The statement "The theory of purchasing power parity is based on many very realistic assumptions and thus can be relied upon to correctly forecast long run changes in exchange rates between two countries" is incorrect. The theory of purchasing power parity is based on many simplified assumptions, and in reality, exchange rates are influenced by a range of complex factors beyond inflation differentials, such as political events, economic growth, and interest rates. Therefore, purchasing power parity cannot be relied upon to predict long-term exchange rate changes with accuracy.

Purchasing Power Parity Means All of the Following Except