Which statement(s) is (are) false regarding absolute PPP?

I. It considers transportation costs, tariffs, quotas, other restrictions and product differentiation.
II. It implies that the real price levels should be equal worldwide.
III. It claims that the exchange rate should be equal to the ratio of the average price levels of the two economies.
IV. Foreign exchange rates will react to differences between domestic and foreign rates of inflation.

Correct Answer: I and IV

In fact absolute PPP ignores transportation costs, tariffs, quotas, other restrictions and product differentiation. IV is the claim of relative PPP.