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Question
Which of the following is a drawback of the purchasing power parity theory?A.It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years.
B.It does not explain change in exchange rates in terms of change in relative prices.
C.It cannot explain when the demand of a particular currency would exceed its supply and vice versa.
D.It does not address inflation in situations where governments control the rate of growth in money supply.
E.It cannot predict exchange rate changes for countries with high rates of inflation and underdeveloped capital markets.
Answer
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