ECON4310- CHP 16

Explain why an exchange rate model based on PPP is a long run theory.

- PPP is a monetary approach to the exchange rate. It is a long run theory because it does not allow for price rigidities. It assumes that price can adjust right away to maintain full employment as well as ppp.

The difference between nominal and real interest rates is that A) nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms.B) nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output.C) nominal interest rates can fluctuate, while real interest rates always remain fixed.D) real interest rates can fluctuate, while nominal interest rates always remain fixed.E) real interest rates are the same in every country, while nominal interest rates are different for every country.

.B) nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output

Which one of the following statements is the MOST accurate? A) Relative price changes could not lead to PPP violations even if trade were free and costless. B) Relative price changes could lead to PPP violations only if trade were free and costless.C) Relative price changes could lead to PPP violations even if trade were free and costless.D) Price changes could lead to PPP violations even if trade were free and costless.E) Price changes could not lead to PPP violations even if trade were free and costless.

.C) Relative price changes could lead to PPP violations even if trade were free and costless.

What is the Fisher Effect?

A rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. A fall in the expected inflation rate will cause a fall in the interest rate.

Which of the following statements is MOST accurate? A) A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.B) A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.C) A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro.D) A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.E) A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

A) A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.

hich of the following statements is MOST accurate?A) In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.B) In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.C) In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate.D) In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate.E) In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

A) In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.

Which of the following statements is the MOST accurate? A) The prices of identical commodity baskets, when converted to a single currency, are the same across countries.B) The prices of identical commodity baskets, when converted to a single currency, differ substantially across countries.C) The prices of identical commodity baskets, when converted to a single currency, do not differ substantially across countries.D) The prices of identical commodity baskets, when converted to a single currency, are often the same across countries.E) The prices of identical commodity baskets, when converted to a single currency, are the same across countries more than 50% of the time.

A) The prices of identical commodity baskets, when converted to a single currency, are the same across countries.

Under sticky pricesA) a fall in the money supply raises the interest rate to preserve money market equilibrium.B) a fall in the money supply reduces the interest rate to preserve money market equilibrium.C) a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. D) a fall in the money supply does not affect the interest rate in the short run, only in the long run.E) a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run.

A) a fall in the money supply raises the interest rate to preserve money market equilibrium.

In practice.. A) changes in national price levels often tell us relatively little about exchange rate movements. B) changes in national price levels raise the exchange rate.C) changes in national price levels lower the exchange rate.D) changes in national price levels often tell us about exchange rate movements.E) changes in national price levels match identical changes in the exchange rate.

A) changes in national price levels often tell us relatively little about exchange rate movements.

When the nominal dollar interest rate ________, money demand will ________, and the general price level will ________.A) increases; decrease; increaseB) increases; increase; increase C) increases; decrease; decrease D) increases; increase; decrease E) decreases; increase; increase

A) increases; decrease; increase

The monetary approach to interest rates assumes that the prices of goods are ________, which implies that a country's currency will ________, when nominal interest rates ________ because of ________ expected future inflation.A) perfectly flexible; depreciate; increase; higher B) perfectly flexible; appreciate; increase; higherC) immutable; depreciate; increase; higherD) immutable; appreciate; decrease; higherE) absolutely inflexible; depreciate; decrease; higher Answer: A

A) perfectly flexible; depreciate; increase; higher

If people expect relative PPP to hold A) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon.B) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively.C) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run.D) the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.E) the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

A) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon.

In the short runA) the interest rate can rise when the domestic money supply falls.B) the interest rate can decrease when the domestic money supply falls.C) the interest rate stays constant when the domestic money supply falls.D) the interest rate rises in the same proportion as the domestic money supply falls. E) the interest rate never rises when the domestic money supply falls.

A) the interest rate can rise when the domestic money supply falls.

Which of the following statements is the MOST accurate? In generalA) the monetary approach to the exchange rate is a long run theory.B) the monetary approach to the exchange rate is a short run theory.C) the monetary approach to the exchange rate is both a short and long run theory.D) the monetary approach to the exchange rate neither long run nor short run theory.E) the monetary approach to the exchange rate is considered less practical than the law of one price.

A) the monetary approach to the exchange rate is a long run theory.

Which of the following statements is MOST accurate? A) In the output market, an increase in demand for U.S. output leads to an increase in the long- run nominal dollar/euro exchange rate.B) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate.C) In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate.D) In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate.E) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate.

B) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate.

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest? A) Gustav CasselB) Irving Fisher C) David Ricardo D) Paul Krugman E) Israel Kirzner

B) Irving Fisher

Which of the following statements is the MOST accurate? A) Relative PPP is not a reasonable approximation to the data. B) Relative PPP is sometimes a reasonable approximation to the data but often performs poorly. C) Relative PPP is sometimes a reasonable approximation to the data.D) PPP is sometimes a reasonable approximation to the data.E) PPP is sometimes a reasonable approximation to the data but usually performs poorly.

B) Relative PPP is sometimes a reasonable approximation to the data but often performs poorly.

An increase in the world relative demand for U.S. output causes A) a short-run real depreciation of the dollar against the euro.B) a long-run real appreciation of the dollar against the euro.C) a long-run real depreciation of the dollar against the euro. D) a short-run real appreciation of the euro against the dollar. E) a long-run real appreciation of the euro against the dollar.

B) a long-run real appreciation of the dollar against the euro.

Floating exchange rates A) systematically lead to much larger but less frequent short-run deviations from the absolute PPP .B) systematically lead to much larger and more frequent short-run deviations from the relative PPP .C) systematically lead to much smaller and less frequent short-run deviations from the relative PPP .D) systematically lead to much smaller but more frequent short-run deviations from the relative PPP .E) systematically lead to much smaller and less frequent short-run deviations from the absolute PPP .

B) systematically lead to much larger and more frequent short-run deviations from the relative PPP .

Which of the following statements is the most accurate? A) Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space.B) Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time.C) Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time.D) Relative PPP is not valid when absolute PPP is not.E) Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time.

C) Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time.

Which of the following statements is MOST accurate? A) The United States price level will place a relatively light weight on commodities produced and consumed in America, while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe.B) The United States price level will place a relatively light weight on commodities produced and consumed in America, and the European price level will place a relatively light weight on commodities produced and consumed in Europe.C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe.D) The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America.E) The United States price level will place a relatively light weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America.

C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe.

Which one of the following statements is the MOST accurate? A) The purchasing power of any given country's currency will increase in countries where the prices of non-tradable goods rise.B) The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods fall. C) The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods rise. D) The purchasing power of any given country's currency will remain constant in countries where the prices of non-tradable goods rise.E) The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods remain constant.

C) The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods rise.

Under PPP (and by the Fisher Effect), all else equal.. A) a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation.B) a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.C) a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.D) a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.E) a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

C) a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.

Under the monetary approach to exchange rate theory, money supply growth at a constant rate A) eventually results in ongoing price level deflation at the same rate, but changes in this long- run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. B) eventually results in ongoing price level inflation at the same rate, but changes in this long- run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services.C) eventually results in ongoing price level inflation at the same rate, but changes in this long- run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. D) eventually results in ongoing price level inflation at the same rate, but changes in this long- run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.E) eventually results in ongoing price level deflation at the same rate, but changes in this long- run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

C) eventually results in ongoing price level inflation at the same rate, but changes in this long- run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.

In the long runA) exchange rates obey relative PPP when all disturbances occur in the output markets.B) exchange rates obey absolute PPP when all disturbances occur in the output markets.C) exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets.D) exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature.E) exchange rates obey absolute PPP when all disturbances are monetary in nature.Answer: C

C) exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets.

The expected rate of change in the nominal dollar/euro exchange rate is best described as A) the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe expected inflation difference.B) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe real interest rate difference. C) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference.D) the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe real interest rate difference.E) the expected rate of change in the real dollar/euro exchange rate plus the European expected inflation.

C) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference.

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rateA) while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. B) while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate.C) while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.D) the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate.E) while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

C) while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.

Which of the following statements is the most accurate? A) If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same.B) If the law of one price holds true for every commodity, PPP must hold automatically.C) If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same.D) If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same.E) If PPP holds true, then the law of one price must hold true automatically.

C.

Which of the following statements is the MOST accurate? A) Absolute PPP does not imply relative PPP.B) Relative PPP implies absolute PPP.C) There is no causality relation between the two. D) Absolute PPP implies relative PPP.E) Absolute PPP is inversely related to relative PPP.

D) Absolute PPP implies relative PPP.

Which of the following statements is the MOST accurate?A) In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded.B) In the long run, national price levels play a key role only in determining interest rates.C) In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded.D) In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded.E) In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded.

D) In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded.

In January 2013, the world's cheapest Big Macs were sold in A) the Philippines.B) Russia.C) China. D) Malaysia.E) the Czech Republic.

D) Malaysia

Which of the following statements is the MOST accurate? A) The law of one price does fare well in all recent studies.B) The law of one price does fare well in many recent studies. C) The law of one price sometimes fares well in recent studies. D) The law of one price does not fare well in recent studies. E) The law of one price has not been studied recently.

D) The law of one price does not fare well in recent studies.

Which of the following statements is the MOST accurate about the Law of One Price on Scandinavian ferry lines?A) Due to menu costs, the Law of One Price does not hold.B) To avoid arbitrage opportunities, the Law of One Price must hold. C) Transaction costs of exchanging currency causes the Law of One Price to fail.D) Transportation costs between ferry lines leads to a violation of the Law of One Price. E) The physical distance allowed the Law of One Price to hold.

D) Transportation costs between ferry lines leads to a violation of the Law of One Price.

The expected real interest rate (re) in terms of the nominal interest rate (R) and the expected inflation rate (πe) is given by A) re = πe + R.B) re = 2πe + R2. C) re = πe + R2. D) re = R - πe. E) re = R2 - πe.

D) re = R - πe.

The monetary approach makes the general prediction thatA) the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies.B) the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them.C) the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them.D) the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them.E) the money supply in the U.S. will adjust to European monetary equilibrium.

D) the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them.

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rateA) the interest rate is not independent of the money supply growth rate in the short run.B) the interest rate is independent of the money supply growth rate in the long run. C) the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run.D) the interest rate is not independent of the money supply growth rate in the long run.E) the interest rate is a factor of the money supply growth rate only in the short term.

D) the interest rate is not independent of the money supply growth rate in the long run.

Under Purchasing Parity:

E$/E = PUS/PE

Which of the following are theories meant to explain "Why price levels are lower in poorer countries"?A) only Bhagwati-Kravis-LipseyB) only Balassa-Samuelson C) only Goldberg-KnetterD) Bhagwati-Kravis-Lipsey and Balassa-Samuelson E) Bhagwati-Kravis-Lipsey and Goldberg-Knetter

E) Bhagwati-Kravis-Lipsey and Goldberg-Knetter

Which one of the following statements is the MOST accurate? A) Departures from PPP are similar in both the short run and long run.B) Departures from PPP are even greater in the long run than in the short run.C) Departures from PPP are always greater in the short run than in the long run.D) It is hard to tell whether departures from PPP are greater in the short run than in the long run. E) Departures from PPP may often be greater in the short run than in the long run.

E) Departures from PPP may often be greater in the short run than in the long run.

In order for the condition E$/HK$ = PUS/PHK to hold, what assumptions does the principle of purchasing power parity make? A) Only that there are no transportation costs and restrictions on trade. B) Only that the markets are perfectly competitive, i.e., P = MC.C) The factors of production are identical between countries.D) No arbitrage exists. E) HK and the U.S. are perfectly competitive and there are no transportation costs or restrictions on trade.

E) HK and the U.S. are perfectly competitive and there are no transportation costs or restrictions on trade.

When all variables start out at their long-run equilibrium levels, the most important determinants of long-run swings in nominal exchange rates do NOT includeA) a shift in relative money supply levels.B) a shift in relative money supply growth rates. C) a change in relative output demand. D) a change in relative output supply. E) a change in relative inflation rates.

E) a change in relative inflation rates.

When the domestic money prices of goods are held constant A) a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods.B) a nominal dollar depreciation makes U.S. goods less appealing in foreign markets.C) a nominal dollar appreciation does not affect the prices of U.S. goods.D) a nominal dollar depreciation makes U.S. goods more expensive compared with foreign goods.E) a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods

E) a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods

Under the monetary approach to the exchange rateA) a reduction in the money supply will cause immediate currency depreciation. B) a rise in the money supply will cause currency depreciation.C) a rise in the money supply will cause immediate currency appreciation.D) a rise in the money supply will cause depreciation.E) a rise in the money supply will cause immediate currency depreciation.

E) a rise in the money supply will cause immediate currency depreciation.

Under the monetary approach to the exchange rate.. A) an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates.B) an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates.C) an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates.D) an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates.E) an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

E) an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

Under sticky prices.. A) an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately.B) an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately.C) an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately.D) an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately.E) an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

E) an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

Interest rate differences between countries depend onA) differences in expected inflation, but not on expected changes in the real exchange rate.B) differences in expected changes in the real exchange rate, but not on expected inflation.C) neither differences in expected inflation, nor on expected changes in the real exchange rate. D) differences in expected inflation and nothing else.E) differences in expected inflation, and on expected changes in the real exchange rate.

E) differences in expected inflation, and on expected changes in the real exchange rate.

The PPP theory fails in reality for all of the following reasons EXCEPTA) transport costs.B) monopolistic or oligopolistic practices in goods markets.C) the inflation data reported in different countries are based on different commodity baskets. D) restrictions on trade. E) inflation rates are unrelated to money supply growth.

E) inflation rates are unrelated to money supply growth.

Under a flexible-price monetary approach to the exchange rateA) when the domestic money supply falls, the price level would eventually fall, increasing the interest rate.B) when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate.C) when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate.D) when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant.E) when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

E) when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

Why is Relative PPP useful when comparing countries that base their price levels on different product baskets?

Relative PPP may be valid when absolute PPP is not.

Explain Purchasing Power Parity

States that the exchange rates between two currencies equals the ratio of the two currencies price levels.

Discuss the relationship between PPP and the Law of One Price.

The Law of One price applies to individual commodities while PPP applies to general price level. - Proponents of PPP argue that its validity in the long run doesn't require the law of one price to hold exactly. - When goods and services temporarily become more expensive in one countries than in others, the demand for its currency and its products falls, pushing the exchange rate and domestic prices back in line with PPP and vice versa.

Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc's exchange rate against the Russian ruble?

The Swiss Franc's exchange rate will appreciate 198%.

Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?

The existence of nontradables allows for deviations from PPP because the price of a nontradable is determined entirely by its domestic supply and demand curves and in turn, fluctuations in demand and supply for these goods will affect the price level.

Which of the following statements is most accurate?

The law of one price applies to individual commodities while PPP applies to the general price level.

The Law of one price states that..

in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.