The empirical evidence on purchasing power parity seems to point out that:
A) purchasing power parity can explain long run movements in exchange rates but does not hold up to scrutiny for short-run changes.
B) purchasing power parity does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run.
C) purchasing power parity is a good theory for international trade, but is of little use in explaining exchange rate movements.
D) inflation and a country's rate of currency appreciation are positively correlated.

Question

Quizplus · Accepted Answer

Empirical evidence suggests that purchasing power parity can explain the long run movements in exchange rates, but not short-run changes. Therefore, option A is the best choice. Option B is incorrect because short-run movements are not explained well by purchasing power parity. Option C is incorrect because purchasing power parity theory is useful for both international trade and exchange rate movements. Option D is incorrect because inflation and a country's currency appreciation are not always positively correlated.

The Empirical Evidence on Purchasing Power Parity Seems to Point