Assumptions of the purchasing power parity theory include all of the following except that
A)all goods and services are identical and tradable.
B)transportation costs are zero and no trade barriers exist.
C)exchange rates are not influenced by relative inflation rates across countries.
D)exchange rates are influenced by relative inflation rates across countries.

Question

Quizplus · Accepted Answer

The purchasing power parity theory assumes that exchange rates are influenced by relative inflation rates across countries, and that all goods and services are identical and tradable, with zero transportation costs and no trade barriers. Therefore, option C is the exception to the assumptions.

Assumptions of the Purchasing Power Parity Theory Include All of the Following