Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada and US$1.80 in the U.S. PPP suggests that the

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PPP suggests that the price of hamburgers should be the same in both countries. However, in this scenario hamburgers cost less in the U.S. (US$1.80) compared to Canada (C$2.00 = US$1.60). This implies that the Canadian dollar is overvalued (i.e. it can buy more than it should be able to based on PPP). To bring PPP back into line, the Canadian dollar needs to depreciate, which means that the demand for Canadian dollars will decrease (option A) and the supply of Canadian dollars will increase (option D), making option E incorrect. Therefore, option B is incorrect as well as the Canadian dollar is overvalued, not undervalued.

Suppose Purchasing Power Parity (PPP) Depends Only on Hamburgers