When all changes in the world are due to
A) fiscal policy, purchasing power parity holds true in the long run.
B) monetary policy, purchasing power parity does not hold true in the long run.
C) monetary policy, purchasing power parity holds true in the long run.
D) monetary policy, purchasing power parity holds true even in the short run.
E) fiscal and monetary policy, purchasing power parity holds true in the long run.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) theory states that in the long run, exchange rates should adjust to equalize the price of identical goods and services in different countries. This theory tends to hold more closely when changes in the world economy are driven by monetary policy rather than fiscal policy, as monetary policy directly affects exchange rates and inflation, key components in the PPP equation.

When All Changes in the World Are Due to