The Purchasing Power Parity (Ppp)theory Best Predicts Exchange Rate Changes
The purchasing power parity (PPP)theory best predicts exchange rate changes for countries with
C)underdeveloped capital markets.
D)small differentials in inflation rates.
The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the
C)purchasing power parity puzzle.
E)foreign exchange risk.
Which of the following is a reason for the failure of the purchasing power parity (PPP)theory to predict exchange rates accurately?
A)It assumes away transportation costs and trade barriers.
B)It does not take into account the law of one price.
C)It does not take into account the practice of arbitrage.
D)It assumes that the markets are not efficient.
E)It does not consider government influence on a nation's money supply.
Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP)theory by violating the assumption of efficient markets?
A)government intervention in cross-border trade
B)relationship between money supply and price inflation
C)impact of increase in currency on relative demand and supply conditions of currencies
D)excessive growth in money supply
E)insignificant impact of transportation costs on international trade