If prices in the U.S.rise less rapidly than in Canada, which of the following would be expected according to purchasing power parity?
A)The value of the Canadian Dollar will decline, relative to the U.S.Dollar
B)The value of the U.S.Dollar will decline, relative to the Canadian Dollar
C)Inflation will increase in Canada
D)The price of gold will decline

Question

Quizplus · Accepted Answer

According to purchasing power parity, if inflation is lower in the U.S. than in Canada, then the goods and services in the U.S. are relatively cheaper than in Canada. This would result in a decrease in the demand for Canadian dollars, and an increase in the demand for U.S. dollars. The increase in demand for U.S. dollars would lead to an appreciation of the U.S. dollar relative to the Canadian dollar, making U.S. goods and services more expensive for Canadian consumers.

If Prices in the U