Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Based on this information what will happen to the exchange rate between the United States and Canada?
A) The value of the U.S. dollar will fall as U.S. residents purchase SUVs in Canada.
B) The value of the Canadian dollar will fall as Canadians purchase SUVs in the United States.
C) The exchange rate will stay the same because purchasing power parity already holds.
D) The value of the Canadian dollar will fall because Canadian prices are lower than U.S. prices.

Question

Quizplus · Accepted Answer

The value of the U.S. dollar will fall as U.S. residents purchase SUVs in Canada because the SUV is cheaper in Canada when converted to U.S. dollars ($32,000 CAD = $24,000 USD at $0.75 USD/CAD), leading to an increased demand for Canadian dollars to make purchases, thereby increasing the value of the Canadian dollar relative to the U.S. dollar.

Suppose That the Price of an Identical Sport-Utility Vehicle Is