Question

If nations erect tariffs and quotas to restrict trade, what is likely to happen to predicted values of currencies drawn from the purchasing power parity theory?

A. They will be understated for tariffs and overstated for
quotas.
B. They will be overstated for tariffs and understated for
quotas.
C. They will be the correct values.
D. They will be incorrect.

Answer 1

B) They will be overstated for tariffs and understated for quotas.

Step-by-step explanation:

Trade tariffs make foreign goods more expensive, resulting in unrealistically "cheaper" domestic products. This would overstate the purchasing power of the economy due to "cheaper" domestic products.

On the other hand, trade quotas reduce the number of imported goods but it tends to increase the price of domestic goods. Domestic suppliers will see a surge in their sales but at a high price. This will artificially lower the purchasing power of the economy due to "expensive" goods.