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 (Purchasing Power Parity) is the theory that suggests that the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in both countries. However, relative price changes could lead to PPP violations (meaning the exchange rate does not move towards the rate that equalizes the prices) even if trade were free and costless. This is because PPP assumes that all goods and services are tradable, and in reality, not all goods and services can be traded freely between countries. Therefore, C is the most accurate statement.

Which One of the Following Statements Is the Most Accurate