A year ago the spot rate of U.S.dollars for Canadian dollars was $1/C$1.Since that time,the rate of inflation in the U.S.has been 4% greater than that in Canada.Based on the theory of Relative PPP,the current spot exchange rate of U.S.dollars for Canadian dollars should be approximately _________ per Canadian dollars.

Question

Quizplus · Accepted Answer

According to the theory of Relative Purchasing Power Parity (PPP), the change in the exchange rate between two currencies should be equal to the difference in their inflation rates over the same period.

In this case, if the U.S. inflation rate was 4% higher than that of Canada, then the U.S. dollar should have depreciated by approximately 4% against the Canadian dollar.

Therefore, the new exchange rate should be:

$1/C$1 + 4% = $1.04/C$1

Hence, the answer is C) $1.04.

A Year Ago the Spot Rate of U