Question

Although the u.s. and most other countries allow their currencies to float, their exchange rates do not completely adjust such that there is purchasing power parity. what are the reasons why the exchange rate for dollars and the currencies of other countries might not completely adjust such that there is purchasing power parity? indicate reasons why purchasing power parity does not exist perfectly.

O Countries have set trade quotas.
O Consumer preferences are different across countries.
O Durable goods are traded internationally.
O Transportation costs may significantly raise the prices of imports.
O Many countries have free trade agreements.

Answer 1

The correct answer is option 4: Transportation costs may significantly raise the prices of imports.

Step-by-step explanation:

The exchange rate for currencies may not completely adjust to purchasing power parity due to transportation costs raising the prices of imports.

The reason why the exchange rate for dollars and other currencies might not completely adjust to purchasing power parity is because transportation costs can significantly raise the prices of imports. When goods are transported across international borders, there are additional costs such as shipping fees, tariffs, and taxes that can impact the final price of the goods in a country. These additional costs can prevent prices from completely equalizing across countries, leading to a deviation from purchasing power parity.

For example, if a country has high transportation costs for importing goods, the prices of those goods will be higher compared to countries with lower transportation costs. This can create a difference in purchasing power between countries, even if their exchange rates are supposed to reflect the buying power of their currencies.