Purchasing power parity does not hold up as well in the short run as it does in the long run because
A) prices are fixed in the short run and the resulting inflexibility is hard to describe theoretically.
B) substitution among similar goods is nearly impossible when an international transaction is involved.
C) goods arbitrage is not an instantaneous, costless process.
D) its conclusions are drawn from price stability, a long-term phenomenon.
E) all of the above.

Question

Quizplus · Accepted Answer

Goods arbitrage, the process of buying goods in one market at a lower price and selling them in another market at a higher price, is not instantaneous or costless. This affects the short-term applicability of purchasing power parity because it takes time and incurs costs to exploit price differences across countries, leading to deviations from parity in the short run.

Purchasing Power Parity Does Not Hold Up as Well in the Short