According to the theory of purchasing power parity, if inflation is 5 percent in the U.S. and 2 percent in Canada, then

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According to the theory of purchasing power parity, the exchange rate should adjust to reflect the difference in inflation rates between two countries. In this case, with inflation being higher in the U.S. than Canada, the U.S. dollar is expected to depreciate against the Canadian dollar over time. This is because the goods and services in the U.S. will become relatively more expensive and less competitive on the global market, leading to a decrease in demand for U.S. dollars and an increase in demand for Canadian dollars.

According to the Theory of Purchasing Power Parity, If Inflation