The Purchasing Power Parity Theory

Multiple Choice

The purchasing power parity theory:

A) is more a predictor of a long-run tendency than of the day-to-day relationship between changes in the price level and the exchange rate.
B) predicts that exchange rates between two currencies will adjust in the short run so that the price level is equal to the exchange rate between two countries.
C) is more a predictor of a short-run phenomenon than of a long-run relationship between the price level and the exchange rate between two countries.
D) is helpful in explaining long-run trends,even though trade barriers and central bank intervention may hinder the usefulness of the theory.
E) tells us that a country's currency generally will appreciate if its inflation rate is higher than that of the rest of the world.