Question Details

What is the purchasing power parity exchange rate 



1. Suppose that in mid-1990 one U.S. dollar bought 1.1 Canadian dollars and in mid-1992 it bought 1.2 Canadian dollars. During this period the annual rate of inflation in the 128 
U.S. was 5 percent and in Canada was 8 percent. During this period the U.S. real exchange rate has 
a) increased by 8% or more b) increased by less than 8% 
c) decreased by 8% or more d) decreased by less than 8% 
2. Suppose the U.S. and Canadian economies, on a flexible exchange rate, are in mutual equilibrium with a common real growth rate of 2%, Canadian money growth of 5% and U.S. money growth of 8%. Then the U.S. dollar should be 
a) depreciating by 2% or less per year b) appreciating by 2% or less per year 
c) depreciating by more than 2% per year d) appreciating by more than 2% per year 
3. Suppose that in mid-1991 one U.S. dollar bought 1.1 Canadian dollars and in mid-1992 it bought 1.2 Canadian dollars. During this period the annual rate of inflation in the U.S. was 5 percent and in Canada was 18 percent. During this period the U.S. real exchange rate has 
a) increased by 8% or more b) increased by less than 8% 
c) decreased by 8% or more d) decreased by less than 8% 
4. Suppose a typical basket of goods and services consists of 4 units of housing and 7 units of food. In the United States a unit of housing costs 2 U.S. dollars and a unit of food costs one U.S. dollar; in Canada these prices are 3 Canadian dollars and 2 Canadian dollars, respectively. If the current exchange rate is 1.5 Canadian dollars per U.S. dollar, What is the purchasing power parity exchange rate ? 
a) 1.3 $C/$US or less b) more than 1.3 $C/$US but not more than 1.5 $C/$US 
c) more than 1.5 $C/$US but not more than 1.7 $C/$US d) more than 1.7 $C/$US 
5. Suppose the American and Canadian economies are in equilibrium with a fixed exchange rate of 1.3 $C/$US and a common inflation rate of 5 percent. If the U.S. increases its money growth rate by two percentage points, when these economies have settled to their new mutual equilibrium the exchange rate ($C/$US) 
a) will be unchanged in both nominal and real terms 
b) will be unchanged in nominal terms but higher in real terms 
c) will be unchanged in nominal terms but lower in real terms 
d) will be unchanged in real terms but lower in nominal terms



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