Which of the following will not be true if exchange rates are determined according to purchasing power parity(PPP)?

If two countries have zero rate of inflation, their bilateral exchange rate will be constant

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In response to a monetary shock, there will occur a overshooting of exchange rates

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The prices of goods will be the same in all the countries when converted at the going rate of exchange

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Exchange rate between any two currencies will be equal to the inflation differential between the two concerned economies

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Solution

The correct option is B In response to a monetary shock, there will occur a overshooting of exchange rates
In practise, exchange rates are not calculated in this way. But if need be, we may do so.

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Which of the following will not be true if exchange rates are determined according to purchasing power parity(PPP)?

The correct option is B In response to a monetary shock, there will occur a overshooting of exchange ratesIn practise, exchange rates are not calculated in this way. But if need be, we may do so.

The correct option is B In response to a monetary shock, there will occur a overshooting of exchange rates
In practise, exchange rates are not calculated in this way. But if need be, we may do so.