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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Evaluate the following statement. "I used my own money, my own land and my own equipment to start my business. Therefore I don't have any costs associated with running my business"
What will be an ideal response?
When there is an external cost, the unregulated market
A) overproduces the good or service. B) underproduces the good or service. C) reaches the most efficient solution. D) minimizes public welfare.
At what U.S. unemployment rate do most economists believe full employment occurs?
a. 0 percent b. between 1.5 and 2.0 percent c. between 4.5 and 5.0 percent d. between 5.5 and 6.0 percent e. between 7.5 and 8.0 percent
If nations begin to specialize in production for the purpose of trade,
A. the utility from consumption will increase, but not the total output. B. total world output will increase, as well as well-being from consumption. C. total world output will increase, but well-being from consumption will not. D. neither total output nor well-being from consumption will change. E. the impact on total output and well-being cannot be predicted.