A widget costs $50 in the US and CAD$53 in Canada.The current exchange rate is 1USD=1.09CAD.Given purchasing power parity,the Canadian dollar would_______to equilibrate prices
A)Appreciate
B)Depreciate
C)Not change
D)None of the above

Question

​A widget costs $50 in the US and CAD$53 in Canada.The current exchange rate is 1USD=1.09CAD.Given purchasing power parity,the Canadian dollar would_______to equilibrate prices
A)​Appreciate
B)Depreciate
C)Not change
D)​None of the above

Quizplus · Accepted Answer

According to the purchasing power parity (PPP), the exchange rate should be such that a widget should cost the same in both countries. But here, the widget costs more in Canada than in the US. Therefore, the Canadian dollar would need to appreciate (i.e., increase in value) relative to the US dollar to equilibrate prices and make the widget cost the same in both countries.

​A Widget Costs $50 in the US and CAD$53 in Canada.The

A Widget Costs $50 in the US and CAD$53 in Canada.The