Foreıgn Trade Deneme Sınavı Sorusu #1399238
Which one of the following statements about the Purchasing Power Parity (PPP) Theory is wrong?
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It claims that the foreign exchange rate will solely be determined by the price level changes in both countries |
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It is based on a principle known as law of one price |
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According the PPP Theory, domestic price level will be equal to the product of the exchange rate and the level of foreign price level |
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The PPP Theory points out that if the prices in the home country increase more |
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It investigates the relationship between the prices of not only the identical goods but also the prices of all goods among countries |
The PPP Theory points out an important fact: If the prices in the home country increase more than the prices in the foreign country, domestic currency must depreciate. On the contrary, if the prices in the foreign country increase more than the prices in the home country, domestic currency must appreciate.
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