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Question 3: (10 points) The Purchasing Power Parity (PPP) is a principle often referred to in the context of exchange rate determination. Below you find

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Question 3: (10 points) The Purchasing Power Parity (PPP) is a principle often referred to in the context of exchange rate determination. Below you find five statements about PPP. Only one of those is accurate. Identify the accurate statement (2 points) and describe shortly for each remaining option, why it is false (2 points each). a. PPP applies only to individual commodities. b. If the law of one price holds true for every commodity, PPP must automatically hold if the reference baskets used to reckon different countries' price levels are the same. c. Relative PPP is not valid when absolute PPP is not. d. The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods fall. e. PPP always holds true if there are no transportation costs and restrictions of trade

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