Explain why exchange rate model based on PPP is a long run theory
What will be an ideal response?
PPP theory is a monetary approach to the exchange rate. It is a long-run theory because it does not allow for price rigidities. It assumes that prices can adjust right away to maintain full employment as well as PPP.
You might also like to view...
Describe the difference in market structure between monopoly and oligopoly
What will be an ideal response?
Which of the following statements correctly describes international trade in accordance with comparative advantage?
a. Trade is impossible unless there exists a purely competitive market for foreign exchange. b. Trade makes all the citizens of the trading countries better off, which is a clear example of a Pareto improvement. c. Trade may well make some citizens in each trading country worse off. d. Trade requires the judicious application by government of tariffs and quotas in order to discourage production according to comparative disadvantage. e. Trade requires that the economies of the trading partners be of roughly equal size (United States versus Andorra just does not work).