The purchasing power parity theory helps explain long-run trends in exchange rates, but not short-run fluctuations.

Question

Quizplus · Accepted Answer

The purchasing power parity theory suggests that exchange rates should adjust in the long-run to equalize the purchasing power of different currencies, but it does not necessarily account for short-term fluctuations in exchange rates caused by various factors such as speculative trading, government policies, or sudden shocks to the economy.

The Purchasing Power Parity Theory Helps Explain Long-Run Trends in Exchange