Deviations from purchasing power parity will be increasingly higher as international trade tariffs become more restrictive.The main reason for this phenomenon is that:
A)arbitrage activities become less profitable.
B)governments prefer purchasing power parity not to hold.
C)the interest rate parity fails to hold.
D)goods become more differentiated across countries.
E)individuals develop hatred toward closed economies.

Question

Quizplus · Accepted Answer

When international trade tariffs become more restrictive, it becomes more difficult for arbitrage activities to equalize prices. As a result, deviations from purchasing power parity become increasingly higher as the prices of goods and services may differ significantly across countries. This can make it challenging for traders to make a profit by buying low in one country and selling high in another, reducing the incentive to engage in arbitrage activities. Thus, choice A is the best answer. None of the other options are directly related to the impact of trade restrictions on purchasing power parity.

Deviations from Purchasing Power Parity Will Be Increasingly Higher as International