Is relative PPP a useful equilibrium concept for describing general trends in exchange rates? Under what kinds of circumstances would the concepts of PPP be best applied?
What will be an ideal response?
Relative PPP is not a theory of exchange rate determination but rather an equilibrium condition that may be useful for establishing general trends in exchange rates. It may only be useful for understanding exchange rates in the long run, not on a day to day basis. Moreover, exchange rates vary for multiple reasons, while relative PPP only considers the inflation differential between two currencies. The larger this difference is, the more valuable relative PPP will be for understanding the long term trend in an exchange rate.
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Suppose a seller's opportunity cost matches a buyer's valuation of the product. Assuming a two-person economy, which of the following statements will be true?
a. The transaction will benefit the buyer, while the seller will neither gain nor lose from it. b. The economic value created by this exchange will be zero. c. Both parties will be worse-off after the transaction. d. The seller will be worse-off than the buyer after the transaction.
Government failure occurs when
a. fewer public goods are produced than private goods b. more public goods are produced than private goods c. less than the socially optimal quantity of public goods is produced d. more than the socially optimal quantity of public goods is produced e. special interests emerge in the market
Two countries with the same saving rates must have the same growth rate of real GDP per person
a. True b. False Indicate whether the statement is true or false
Which statement is false?
A. Under Soviet communism, government planning was substituted for the price mechanism. B. The entire Soviet economy was a Rube Goldberg contraption of subsidies, fixed prices, bureaucratic rules and regulations, special privilege, and outright corruption. C. Had Mikhail Gorbachev not begun dismantling the communist bureaucracy, the Soviet system probably would have been able to continue carrying on business as usual for another century. D. None of the statements are false.