Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP)theory by violating the assumption of efficient markets?

Question

Quizplus · Accepted Answer

Government intervention in cross-border trade can distort market forces, making exchange rates deviate from what PPP theory suggests. For example, a government imposing tariffs or quotas on imports can drive up prices in the domestic market, which could lead to a higher exchange rate than what PPP theory would predict.

B, C, and D all involve economic factors that may affect exchange rates but do not specifically weaken the link between relative price changes and changes in exchange rates predicted by PPP theory.

E is incorrect because transportation costs have a significant impact on international trade, but they do not necessarily weaken the link between relative prices and exchange rates predicted by PPP theory.

Which of the Following Weakens the Link Between Relative Price