The PPP theory would be most useful in predicting:
A) short-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods.
B) long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods.
C) short-run changes in the exchange rate for a country that mainly produces lightly-traded standardized goods.
D) long-run changes in the exchange rate for a country that mainly produces lightly-traded non-standardized goods.

Question

Quizplus · Accepted Answer

The PPP theory suggests that in the long-run, the exchange rate between two countries should adjust to reflect differences in their inflation rates. Therefore, it would be most useful in predicting long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. This is because such goods are more likely to be subject to international pricing pressures, which should influence inflation rates and ultimately affect exchange rates in the long run.

The PPP Theory Would Be Most Useful in Predicting