The reason relative purchasing power parity (RPPP) is better at predicting exchange rates than absolute purchasing power parity (APPP) is because:
a. Actually, it is the other way around. APPP has been shown empirically and theoretically to be a more accurate way to predict exchange rates.
b. APPP deals only with countries that have some sort of imbalance like hyperinflation. RPPP deals with any and all countries, which makes the job of predicting exchange rates easier.
c. APPP has to begin and end in parity. RPPP just requires that the initial disequilibrium remain the same.
d. APPP predictions are often biased because of central bank controls, sticky prices, and protectionism. RPPP can abstract from these problems.
Question 2 - The nominal, effective exchange rate is the:
a. Nominal, effective exchange rate adjusted for a nation's price level relative to many foreign countries' prices.
b. Value of one currency in terms of another currency.
c. Weighted-average value of a currency relative to many foreign currencies.
d. Nominal, bilateral exchange rate adjusted for the international price levels of the two countries.
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