The table below shows hypothetical indexes for the price levels for Canada and the United States and hypothetical nominal exchange rates between their currencies (the Canadian-dollar price of 1 U.S.dollar). TABLE 34-2 Refer to Table 34-2.According to the theory of purchasing power parity (PPP),the Canada-U.S.exchange rate in 2014 should have been

Question

The table below shows hypothetical indexes for the price levels for Canada and the United States and hypothetical nominal exchange rates between their currencies (the Canadian-dollar price of 1 U.S.dollar).  TABLE 34-2 Refer to Table 34-2.According to the theory of purchasing power parity (PPP),the Canada-U.S.exchange rate in 2014 should have been

Quizplus · Accepted Answer

The theory of purchasing power parity (PPP) suggests that the exchange rate between two currencies should adjust to reflect the differences in price levels between the two countries. In this case, we can calculate the expected exchange rate using the following formula: expected exchange rate = (price level in Canada / price level in the US). Plugging in the values from the table, we get: expected exchange rate = (122 / 115) = 1.06. Therefore, the best choice is E.

The Table Below Shows Hypothetical Indexes for the Price Levels