What is the limitation of using exchange rate-based measures as ...

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What is the limitation of using exchange rate-based measures as indicators of the standard of living across countries?
 
  What will be an ideal response?

Question 2

Figure 9.1 shows three aggregate demand curves. A movement from curve AD1 to curve AD2 could be caused by a(n)
 
  A) increase in the money supply. B) decrease in government spending.
  C) increase in taxes. D) increase in the price level.

[kingfahad97]

Answer to Question 1

Exchange rates convert currencies into the same units but fail to account for the fact that the prices of many goods and services differ across countries. Fluctuations in exchange rates have little to do with changes in prices in different countries and are unable to account for the differences in cost of living. Therefore, if exchange rates are used to compare the income per capita of different countries, there is a possibility that the income per capita of a country will be overestimated.

Answer to Question 2

A