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2 years ago

If purchasing power parity holds, when a country's central bank decreases the money supply, its:_____.

1 answer:

8 0

If purchasing power parity holds, when a country's central bank decreases the money supply, its <u>If purchasing power parity holds, when a country's central bank decreases the money supply, its price level (rises/falls) and its currency (appreciates/depreciates) relative to other currencies in the world. </u>

A theory of exchange rate determination and a means to compare average prices of goods and services between nations is purchasing power parity (PPP).

According to the hypothesis, fluctuations in the spot exchange rate are caused by importers' and exporters' actions, which are prompted by variations in prices across nations.

Alternatively, PPP contends that changes to a nation's current account may have an impact on the value of the currency's exchange rate on the foreign exchange (Forex) market.

In contrast, the interest rate parity theory postulates that fluctuations in the exchange rate are caused by investor actions (whose transactions are reported on the capital account).

The "law of one price" as it pertains to the overall economy is the foundation of PPP theory.

Hence, option A and D is correct.

To learn more about PPP here

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There are instances where it is not needed however such as when:

It slows down processes - sometimes leaders will need to give permission for a subordinate to do something. If this thing is time conscious and the leader is not available to give their ascent, the whole process could suffer.

It oppresses people - when a leader is an oppressive one and acts in such a way that their subordinates suffer, that leadership is not needed.

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