Because there are a variety of factors in addition to inflation that affect exchange rates, this will

Available Options Are:

A. Reduce the probability that PPP shall hold.

B. Increase the probability that PPP shall hold.

C. Increase the probability the IFE will hold.

D. B and C

Option A. Reduce the probability that PPP shall hold

Explanation:

The reason is that Purchasing Power Parity Theory assumes:

These are some factors that will definitely affect the reliability of the theory. Hence these assumptions are unrealistic and it is obvious that the model will not hold true because of these unrealistic assumptions and other factors like interest rate, government debt, recession, etc.

Hence the option A is correct here.

If Option A is correct then Option B is incorrect because is totally opposite.

Option C is incorrect because it assumes that their are no external factors that will be affecting the exchange rate which means that the exchange rate is not controlled by the government. This means it only holds for long term and not for short term. Hence the Option C is incorrect.