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 appreciate relative to the
Canadian dollar.

Question

Quizplus · Accepted Answer

Inflation differential suggests that the currency with higher inflation rate will depreciate relative to the currency with lower inflation rate. Therefore, the Canadian dollar will appreciate relative to the U.S. dollar, not the other way around.

Assume That the Inﬂation Rate in Canada Is 3 Percent