Suppose that the nominal exchange rate between the U.S.dollar and the Canadian dollar is 0.75 U.S.dollars per Canadian dollar.If Canada's rate of inflation is 0 percent and the U.S.rate is 10 percent,then the real exchange rate for the U.S.dollar will
A)appreciate by about 9 percent.
B)appreciate by 10 percent.
C)depreciate by about 9 percent.
D)depreciate by 10 percent.

Question

Quizplus · Accepted Answer

The real exchange rate adjusts for inflation differences between two countries. If the U.S. inflation rate is 10% and Canada's is 0%, the value of the U.S. dollar in real terms will appreciate relative to the Canadian dollar. The approximate appreciation can be calculated using the formula (1 + US inflation rate) / (1 + Canada inflation rate) - 1, which gives about 9% appreciation.

Suppose That the Nominal Exchange Rate Between the U