Question

according to the theory of purchasing power​ parity, if the price level in the united states rises by​ 5% while the price level in mexico rises by​ 6%, then the dollar will a. appreciate​ 5% relative to the peso. b. depreciate​ 5% relative to the peso. c. appreciate​ 1% relative to the peso. d. depreciate​ 1% relative to the peso. part 2 reasons why the theory of purchasing power parity might not fully explain exchange rate movements include a. changes in the domestic price level that exceed changes in the foreign price level. b. changes in foreign price levels that exceed changes in the domestic price level. c. changes in the prices of goods and services not traded internationally. d. differing monetary policies in different countries.

Answer 1

According to the theory of purchasing power​ parity, if the price level in the united states rises by​ 5% while the price level in Mexico rises by​ 6%, then the dollar will.

1..... D.  appreciate 1% relative to peso.

The theory of PPP explains that exchange rate is automatically changed according to change in the price level of relative countries . As price level increases more in Mexico by 1% so peso will depreciate by 1% or dollar will appreciate by 1% .

2...... B. Changes in the prices of goods and services not traded internationally.  

According to the theory of PPP , the exchange rate of two currencies depends upon prevailing price levels in both the countries.  However all goods are not traded , how these not traded goods prices affects exchange rate?. This theory doesn't fully explain this scenario.

Purchasing is the process a business or enterprise makes use of to accumulate goods or services to perform its goals. although there are several companies that try to set standards inside the shopping manner, procedures can range greatly between corporations.

Learn more about Purchasing here:-

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