There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion: The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in all types exchange rate system.
Reasoning: The purchasing Power (PPP) theory is a theory of international exchange which holds that the price of similar goods in different countries is the same.
Answer & explanation
Correct answer: option 4
The correct answer is option 4: Assertion (A) is not true but Reasoning (R) is correct.
Assertion: The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in all types exchange rate system. This is incorrect. The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system.
Reasoning: The purchasing Power (PPP) theory is a theory of international exchange which holds that the price of similar goods in different countries is the same. This is correct. According to the theory, as long as there are no barriers to trade like tariffs (taxes on trade) and quotas (quantitative limits on imports), exchange rates should eventually adjust so that the same product costs the same whether measured in rupees in India, or dollars in the US, yen in Japan and so on, except for differences in transportation. Over the long run, therefore, exchange rates between any two national currencies adjust to reflect differences in the price levels in the two countries