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Purchasing Power Parity- inflation and exchange rate

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Suppose that the inflation rate in the United States is 4 percent and in Canada it is 5 percent. What would you expect is happening to the exchange rate between the United States and Canadian dollars?

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Solution Summary

Explains the effect of relative inflation on exchange rate.

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Suppose that the inflation rate in the United States is 4 percent and in Canada it is 5 percent. What would you expect is happening to the exchange rate between the United States and Canadian dollars?

The US dollar will appreciate by 1% against the Canadian dollar according to the relative version of purchasing power parity.

A country where ...

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