If we assume that prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then:
A) we can determine changes in exchange rates if absolute PPP holds.
B) absolute PPP will hold.
C) relative PPP will hold.
D) exchange rates will not change.

Question

Quizplus · Accepted Answer

If prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then relative PPP will hold. This is because changes in inflation rates will impact exchange rates, as different inflation rates will result in different changes in the relative prices of two countries' goods. Therefore, while absolute PPP may not necessarily hold, relative PPP will still be relevant in determining exchange rates in the long run.

If We Assume That Prices Adjust in the Long Run