Purchasing power parity does a ________ job in explaining movements in nominal exchange rates in the short run and does a ________ job in explaining movements in nominal exchange rates in the long run.
A) reasonable; reasonable
B) reasonable; poor
C) poor; reasonable
D) poor; poor

Question

Quizplus · Accepted Answer

Purchasing power parity does a poor job in explaining short-term exchange rate movements because it does not account for factors such as speculative trading, capital flows, and political events. However, it does a reasonable job in explaining long-term exchange rate movements because over time, exchange rates are more likely to converge towards the PPP rate due to arbitrage opportunities.

Purchasing Power Parity Does a ________ Job in Explaining Movements