The theory of purchasing power parity can help predict short-term movements in e

Question

The theory of purchasing power parity can help predict short-term movements in exchange rates. True False You need to purchase Japanese yen and have called two brokers to get quotes. The first broker offered you a rate of 120 yen per dollar. The second broker, ignoring market convention, quoted a price of 0.0079 dollars per yen. To which broker should you give your business? The Second Broker Either is fine The First Broker If the price (measured in a common currency) of a particular basket of goods is 10 percent lower in France than it is in the United States, which country's currency is undervalued, according to the theory of purchasing power parity? United States France

Explanation / Answer

question 4 -->FALSE. PPP is not useful for predicting exchange rates on the short-term basis mainly because international commodity arbitrage is a time-consuming process.

QUESTION 5 --> The First Broker. Because

Because first broker quoting 0.0083 dollars per yen higher than second broker's 0.0079 dollars per yen.since for each dollar we will receive more Yen.

question 6 = France.

the US dollar to be overvalued with respect to the Euro means that goods and services are relatively more expensive in the US than in France.

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