土豆妮

Which of the following statements regarding relative purchasing power parity (PPP) is FALSE?

A) Short-term inflation differentials are insignificant in regards to exchange rates; only the long-run differentials are important to relative PPP.

B) To keep the relative cost of goods and services the same across borders, countries with higher rates of expected inflation should see their currencies depreciate.

C) If relative PPP holds, overvalued currencies will depreciate over time, while undervalued currencies will appreciate.

---

According to relative PPP, exchange rates will adjust to inflation differentials. However, empirical evidence indicates that relative PPP tends to hold over the longer term, but not over the short term.

土豆妮

The law of one price is:

A) not dependent on the potential for arbitrage profits to hold in practice.

B) consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

C) inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

---

The law of one price is consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

土豆妮

The law of one price is:

A) consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

B) not dependent on the potential for arbitrage profits to hold in practice.

C) inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

---

The law of one price is consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

土豆妮

Which of the following statements regarding purchasing power parity (PPP) is FALSE?

A) Relative PPP states that prices for goods and services are the same whether it is for one good or for a basket of goods.

B) Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level.

C) Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good.

---

Relative PPP does not state that prices for goods and services are the same, only that the rate of change in the FX rate is a function of the inflation differentials between the two countries.