Answer to Question 1
PPP is not a theory of exchange rate determination. It describes an equilibrium relationship between two endogenous variablesprices and exchange rates. As such, the PPP relationship should be viewed as a short-cut rather than a substitute for a complete determination of prices and exchange rates. Its main usefulness is in providing a guide to the general trend of exchange rates rather than day-to-day fluctuations.
Answer to Question 2
D