Suppose the price of gold is initially $300 per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ________ Canadian dollars per U.S. dollar.
A)0.59; 0.67
B)0.67; 0.59
C)1.70; 1.50
D)1.50; 1.70

Question

Quizplus · Accepted Answer

If the law of one price holds, the nominal exchange rate is 450/300 = 1.50 Canadian dollars per U.S. dollar. If Canada experiences inflation but the U.S. does not, then the nominal exchange rate is 510/ 300 = 1.70 Canadian dollars per U.S. dollar.

Suppose the Price of Gold Is Initially $300 Per Ounce