If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)
A) The demand for the dollar will rise since the dollar is undervalued.
B) The demand for the dollar will fall since the dollar is overvalued.
C) The supply of the dollar will fall since the dollar is undervalued.
D) The demand and supply of dollars will remain the same as the dollar is correctly valued.
E) No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the Canada and Ukraine.
Correct Answer:
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