If the 2005 inflation rate in Canada is 4 percent,and the inflation rate in Mexico is 2 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the Canadian dollar in terms of Mexican pesos will

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According to the theory of purchasing power parity (PPP), the exchange rate should adjust in response to differences in inflation rates between two countries. In this case, since Canada has a higher inflation rate than Mexico, the Canadian dollar is expected to depreciate relative to the Mexican peso. The extent of the depreciation can be calculated as the difference in inflation rates, which is 2 percent (4 percent - 2 percent). Therefore, the value of the Canadian dollar in terms of Mexican pesos is expected to fall by 2 percent during 2005.

If the 2005 Inflation Rate in Canada Is 4 Percent,and