Purchasing power parity is better at predicting ________ exchange rates.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is better for predicting long-term exchange rates. This is because PPP theory suggests that the exchange rate between two currencies should adjust over time to reflect changes in the price levels of the two countries. As price levels change slowly and predictably over time, this makes PPP a more reliable tool for long-term exchange rate predictions. Short-term exchange rate movements are typically influenced by a range of other factors such as interest rates, geopolitical events, and market sentiment. Therefore, short-term exchange rate predictions are typically harder to make and rely on a wider range of factors. Spot exchange rates refer to the current exchange rate at any given moment and therefore PPP is not a predictor of spot exchange rates. PPP can be used in relation to any currency pairs, not just European currencies.

Purchasing Power Parity Is Better at Predicting ________ Exchange Rates