1. CPP may not hold because: (a) The prices for individual goods are sticky. (b) Transaction costs...

Question:

1. CPP may not hold because:

(a) The prices for individual goods are sticky.

(b) Transaction costs increase the bounds on deviations from CPP, making it more difficult to arbitrage away price differences.

(d) Parallel imports lead to two different prices for the same good.

(e) The prices of tradable goods fluctuate too much, which makes it difficult to take advantage of arbitrage opportunities.

2. Absolute Purchasing Power Parity may not hold when:

(a) The prices of individual goods in the consumption bundle consistently deviate from CPP across two countries.

(b) It can be computed even if the consumption bundles of different countries are not the same (ie if the APPP rate cannot even be defined, theoretically).

(d) There are tariffs, quotas, and voluntary export restraints.

(e) Competition is perfect.

3. Relative Purchasing Power Parity is relevant because:

(a) Empirical tests have shown that Absolute PPP is always violated, while Relative PPP is a good predictor of short-term exchange rate exposure.

(b) Consumption bundles are not always comparable across countries.

(d) Investors care about the real return on their international portfolio investments.

(e) Investors care about the nominal return on their international portfolio investments.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...