Identify the incorrect statement about the PPP theory.
A)It predicts that exchange rates are determined by relative prices.
B)It yields accurate predictions in the short run.
C)It best predicts exchange rate changes for countries with high rates of inflation.
D)It assumes away transportation costs and barriers to trade.

Question

Quizplus · Accepted Answer

PPP theory is more accurate in the long run than in the short run. In the short run, exchange rates can be influenced by other factors such as speculation, political events, and changes in interest rates.

Identify the Incorrect Statement About the PPP Theory