Assume that the inﬂation rate in Canada is 3 percent over the next four years while the rate in the
U.S. is 4 percent for the same time period. Given this, the U.S. dollar will depreciate relative to the
Canadian dollar.

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, a country with a higher inflation rate will have its currency depreciate relative to a country with a lower inflation rate. Therefore, the US dollar will depreciate relative to the Canadian dollar due to the higher inflation rate in the US compared to Canada.

Assume That the Inﬂation Rate in Canada Is 3 Percent