On behalf of your firm, you make frequent trips to Singapore. You notice that you always have to pay more dollars to get enough local currency to get your nails manicured than you have to pay to get manicured in the United States. This is
A)inconsistent with purchasing-power parity, but might be explained by limited opportunities for arbitrage in manicuring across international borders.
B)consistent with purchasing-power parity if prices in Hong Kong are rising more rapidly than prices in the United States.
C)consistent with purchasing-power parity if prices in Hong Kong are rising less rapidly than prices in the United States.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

In theory, purchasing-power parity (PPP) suggests that exchange rates should adjust to equalize the prices of a basket of traded goods and services across different countries. However, in practice, there may be limited opportunities for arbitrage in certain markets, such as manicuring, which can result in higher prices in one country compared to another. Therefore, the inconsistency with PPP can be explained by limited opportunities for arbitrage in manicuring across international borders.

On Behalf of Your Firm, You Make Frequent Trips to Singapore