Explain the law of one price and the theory of purchasing power parity. Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates?
What will be an ideal response?
With no trade barriers and low transport costs, the law of one price states that the price of traded goods should be the same in all countries. The purchasing power parity theory extends the law of one price to total economies. PPP states that exchange rates should adjust to reflect changes in the price levels between two countries. PPP may fail to fully explain exchange rates because goods are not identical, and price levels include traded and nontraded goods and services. Long-run exchange rates are determined by domestic price levels relative to foreign price levels, trade barriers, import and export demand, and productivity.
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In the long run, total fixed cost equals zero
Indicate whether the statement is true or false
If the price elasticity of demand for football tickets is 4.5, then a 10 percent increase in the price of football tickets will generate a
a. 4.5 percent decrease in quantity demanded b. 4.5 percent increase in quantity demanded c. 45 percent decrease in quantity demanded d. 45 percent increase in quantity demanded e. 450 percent increase in quantity demanded