1) The theory of purchasing power parity cannot fully explain exchange rate movements because

A) all goods are identical even if produced in different countries.

B) monetary policy differs across countries.

C) some goods are not traded between countries.

D) fiscal policy differs across countries.

2) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in

A) the trade balances of the two countries.

B) the current account balances of the two countries.

C) fiscal policies of the two countries.

D) the price levels of the two countries.

3) If the real exchange rate between the United States and Japan is ________, then it is cheaper to buy goods in Japan than in the United States.

A) greater than 1.0

B) greater than 0.5

C) less than 0.5

D) less than 1.0

4) According to PPP, the real exchange rate between two countries will always equal ________.

A) 0.0

B) 0.5

C) 1.0

D) 1.5