Purchasing power parity does not hold in the short to medium run because (a) exports don't equal imports. (b) exchange rates fluctuate too much. (c) most business cycles are caused by shocks to aggregate demand. (d) some goods aren't internationally traded.
Added by Remedios B.
Step 1
PPP is more about the relative cost of goods and services between different countries, not the balance of trade. (b) While exchange rates do fluctuate, this is not the primary reason why PPP does not hold in the short to medium run. PPP is a long-term economic Show more…
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