Question

The law of one price states that:

The nominal exchange rates should always be the same as the real exchange rates, both in the short run and in the long run

In ideally efficient markets, the real purchasing power of a currency should be the same regardless of where it is spent

The cost of an individual good should be higher in countries with higher productivity

Which of the following scenarios illustrates why the law of one price may not hold? Check all that apply.

The formation of the European Union creates a custom union among its member states, where internally traded goods are not subject to custom duties, tariffs, or import quotas.

Small electronic devices, such as computer chips, are relatively light and can be shipped in bulk.

Cement is very heavy, and the cost of shipping is measured by weight.

Answer 1

a) The PPP states In an ideally efficient market, real purchasing power of a country should be the same regardless of where it is spent.

answer is "B".

b) stationary, such as papers are shipped at a lower cost and cements and other goods are not traded, non traded goods prevent the PPP from being true. Transportation hinders the PPP.

The answer is "C" only.

The theory of purchasing power parity Which of the following does the purchasing power parity (PPP) theorem state? The nominal exchange rates should always be the same as the real exchange rates, both in the short run and in the long run. O In ideally efficient markets, the real purchasing power of a currency should be the same regardless of whereit is spent. O The cost of an individual good should be higher in countries with higher productivity Which of the following scenario illistrates why the PPP may not hold? Check all that apply. stationery, such as writing paper, is relatively light and can be shipped in bulk. The formation of the European Union creates a custom union among its member states, where internally traded goods are not subject to custom duties, tariffs, or import