The PPP theory fails in reality for all of the following reasons EXCEPT
A) transport costs.
B) monopolistic or oligopolistic practices in goods markets.
C) the inflation data reported in different countries are based on different commodity baskets.
D) restrictions on trade.
E) inflation rates are unrelated to money supply growth.

Question

Quizplus · Accepted Answer

The Purchasing Power Parity (PPP) theory does not fail due to inflation rates being unrelated to money supply growth. In fact, PPP theory often assumes a relationship between money supply and inflation rates, as changes in a country's money supply can influence its inflation and thus its currency's purchasing power relative to other currencies. The other options (A, B, C, D) are recognized factors that can cause deviations from PPP by affecting prices or the flow of goods across borders, thus hindering the theory's applicability in real-world scenarios.

The PPP Theory Fails in Reality for All of the Following