On average,foreign currency will depreciate against the Canadian dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of Canada.

Question

Quizplus · Accepted Answer

This statement is known as the purchasing power parity theory, which suggests that over the long term, the exchange rate between two currencies should adjust to reflect the difference in their inflation rates. If a foreign currency has a higher inflation rate than Canada, its value should depreciate relative to the Canadian dollar in order to maintain purchasing power parity. However, there may be other factors that affect exchange rates in the short term.

On Average,foreign Currency Will Depreciate Against the Canadian Dollar at a Percentage