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Instead of using \w I believe it would be a capital W like:
PS1='\u@\h\W\$ '
One reason I wouldn't want the full path instead of the current directory is if or when your in a say a sub directory so deep, your prompt is only going to get longer.
Say you cd'd into: /usr/local/bin/blah/blah/blah
Your prompt is going to reflect that.
man bash for all your options in setting up your prompt.
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