The purchasing power parity theory is not a good explanation of nominal exchange rate determination in the short-run because:
A) there is no evidence that low inflation is associated with less rapid nominal exchange rate depreciation.
B) most nominal exchange rates are fixed and foreign exchange markets do not bring the supply and demand for currencies into equilibrium.
C) most goods and services are traded internationally and are standardized.
D) many goods and services are not traded internationally and not all internationally-traded goods are standardized.

Question

Quizplus · Accepted Answer

The purchasing power parity theory assumes that all goods and services are traded internationally and standardized, which is not the case. Additionally, in the short run, factors such as changes in market sentiment, speculation, and government policies can significantly affect exchange rates, making the PPP theory less accurate in explaining exchange rate determination.

The Purchasing Power Parity Theory Is Not a Good Explanation