Which of the following is not an assumption of the Purchasing Power Parity theory? -------
A)There are no trade barriers between countries
B)The price index for each of the two countries must be comprised of the same basket of goods
C)All the prices should be indexed to the same year
D)Changes in the exchange rate changes internal price level

Question

Which of the following is not an assumption of the Purchasing Power Parity theory? -------                      
A)There are no trade barriers between countries
B)The price index for each of the two countries must be comprised of the same basket of goods
C)All the prices should be indexed to the same year
D)Changes in the exchange rate changes internal price level

Quizplus · Accepted Answer

The Purchasing Power Parity (PPP) theory assumes that changes in exchange rates between currencies are influenced by changes in the countries' price levels, rather than the other way around. It does not assume that changes in the exchange rate directly alter a country's internal price level.

Which of the Following Is Not an Assumption of the Purchasing