If purchasing power parity were perfectly applicable in both the short and long runs, then you would expect to observe
A) net exports depending on real income and the real exchange rate.
B) net exports depending only on real income.
C) net exports being exogenously fixed by policy makers.
D) net exports depending only on movement in the real exchange rate.
E) net exports depending only on foreign variables.

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) implies that exchange rates adjust to equalize the price of a basket of goods across countries, effectively making the real exchange rate constant. If PPP holds perfectly in both the short and long runs, net exports would depend only on real income differences, as exchange rate effects are neutralized.

If Purchasing Power Parity Were Perfectly Applicable in Both the Short