Question

The purchasing power parity principle

a		is not applicable in the long run.
b		asserts that a commodity costing $10 in the U.S. should cost 10 in Germany.
c		asserts that if the same commodity costs $5 in the U.S. and 5 in Germany, the exchange rate should be $1 = 1.
d		asserts that if the same commodity costs $5 in the U.S. and 10 in Germany, the exchange rate should be $2 = 1 .

Answer 1

Ans)

Option A is correct

i.e

Is not applicable in the long run

Because

EXPLANATION;
economists have conceived of an alternative way to interpret or apply the PPP theory to overcome the empirical testing problem. The trick is to think of PPP as a “long-run” theory of exchange rate determination rather than a short-run theory. Under such an interpretation, it is no longer necessary for PPP to hold at any point in time. Instead, the PPP exchange rate is thought to represent a target toward which the spot exchange rate is slowly drawn.