Evidence suggests that convergence to PPP occurs:
A) instantly, as arbitrageurs take advantage of profit opportunities.
B) rapidly, as arbitrageurs learn of profit opportunities.
C) slowly, as arbitrageurs operate, and production, prices, and exchange rates adjust.
D) never.

Question

Quizplus · Accepted Answer

Convergence to PPP occurs slowly as arbitrageurs operate and production, prices, and exchange rates adjust. This is because it takes time for information to be disseminated and for pricing adjustments to be made in response to changes in exchange rates. The process can be delayed further by factors such as transportation costs, regulatory barriers, and political risks. Therefore, it is unlikely for it to happen instantly or rapidly. Convergence may not occur if there are persistent structural differences in the economies of the countries involved.

Evidence Suggests That Convergence to PPP Occurs