The next questions refer to the following.
During a common base period, a basket of goods costs C$14,700 in Canada and US$10,000 in the US.
-Then purchasing power parity theory predicts that
A) the real exchange rate will be 1.47
B) the US will experience 4.7% more inflation annually than Canada for 10 years
C) C$1 should exchange nominally for US$0.68
D) the Canadian dollar will depreciate by 47% against the US dollar
E) the US dollar will depreciate by 47% against the Canadian dollar

Question

Quizplus · Accepted Answer

Purchasing power parity theory states that the exchange rate between two countries should equalize the prices of a basket of goods and services between the two countries. Therefore, if the basket costs C$14,700 in Canada and US$10,000 in the US, the nominal exchange rate should be C$1 for US$0.68, as this is the exchange rate that equalizes the prices of the basket in each country.

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