The doctrine of purchasing-power parity:
A) is a completely accurate description of the real world.
B) would be entirely accurate if only goods were traded.
C) would be entirely accurate if all consumers had the same preferences.
D) provides a reason to expect that movements in the real exchange rate will typically be small or temporary.

Question

Quizplus · Accepted Answer

The doctrine of purchasing-power parity suggests that over time, exchange rates between countries will adjust to reflect changes in relative inflation rates. However, this theory is based on several assumptions, including the assumption that all goods can be traded and that consumers have the same preferences. In reality, these assumptions are not always true, leading to movements in exchange rates that may not always align with PPP. As a result, movements in real exchange rates can still occur, although they may be smaller or more temporary than would be expected without PPP.

The Doctrine of Purchasing-Power Parity