Suppose that the current spot exchange rate of Canadian dollars for Russian rubles is $0.15/1ruble. The price of Russian-produced goods increases by 8 percent, and the Canadian price index increases by 3 percent. According to PPP, the new exchange rate of Russian rubles to dollars is

Question

Quizplus · Accepted Answer

According to PPP, the exchange rate should adjust to reflect the relative changes in price levels between the two countries. The inflation differential is 8% - 3% = 5%, which means that the ruble should depreciate by 5% against the dollar. This gives a new exchange rate of 0.15/1.05 = 0.142857 or approximately 0.1425. Therefore, the best answer choice is B.

Suppose That the Current Spot Exchange Rate of Canadian Dollars