Which one of the following statements is the MOST accurate?
A) Relative price changes could not lead to PPP violations even if trade were free and costless.
B) Relative price changes could lead to PPP violations only if trade were free and costless.
C) Relative price changes could lead to PPP violations even if trade were free and costless.
D) Price changes could lead to PPP violations even if trade were free and costless.
E) Price changes could not lead to PPP violations even if trade were free and costless.

Question

Quizplus · Accepted Answer

PPP violations occur when the exchange rate does not adjust to reflect relative price changes across countries. These relative price changes could occur due to changes in supply and demand factors or changes in inflation rates. Even if trade were free and costless, a change in relative prices could lead to a PPP violation if the exchange rate does not adjust accordingly. Therefore, option C is the most accurate statement.

Which One of the Following Statements Is the MOST Accurate