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Suppose that during 2016, the price level in the U.S. rose at a faster rate than...

Suppose that during 2016, the price level in the U.S. rose at a faster rate than the price level in Canada. According to the law of one price and purchasing power parity, this difference in inflation rates should have caused the nominal exchange rate of the U.S. dollar to appreciate relative to the Canadian dollar. the real exchange rate of the U.S. dollar to depreciate relative to the Canadian dollar. the real exchange rate of the U.S. dollar to appreciate relative to the Canadian dollar. the nominal exchange rate of the U.S. dollar to depreciate relative to the Canadian dollar.

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Answer #1

Inflation has no effect on the real exchange rate while the nominal exchange is affected and in this case, the inflation rate in the United States rose at a faster rate than that of Canada and this means price level in the US is growing at a higher rate than that of US and this tells you that the exchange rates caused by the difference in inflation rates makes you get more US dollars per Canadian dollar which means US dollar has depreciated.

Therefore (d) US Dollar to depreciate relative to the Canadian Dollar is the answer

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