One reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately is because it
A) assumes away transportation costs and trade barriers.
B) does not take into account the law of one price.
C) does not take into account arbitration.
D) assumes that the markets are not efficient.
E) does not consider government influence on a nation's money supply.

Question

Quizplus · Accepted Answer

The PPP theory assumes that there are no transportation costs or trade barriers, which can affect the prices of goods and thus the exchange rates, leading to inaccuracies in its predictions.

One Reason for the Failure of the Purchasing Power Parity