Which Statement Best Explains the Relationship Among Price Levels, Nominal

question 209

Multiple Choice

Which statement best explains the relationship among price levels, nominal and real exchange rates, and money supply in Canada and Ireland when purchasing-power parity holds?

• A) When the price level in Canada falls more rapidly than that in Ireland, the real exchange rate, defined as Irish goods per unit of Canadian goods, stays the same.
• B) When the money supply in Canada rises more rapidly than in Ireland, the nominal exchange rate, defined as euros (the currency used in Ireland) per dollar, increases.
• C) When prices for the same goods are the same in Canadian dollars in Canada and Ireland, the nominal exchange rate does not change.
• D) When prices in both countries stay the same and the nominal exchange rate increases, the real exchange rate decreases.

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Definitions:

Minimize

To reduce to the smallest possible amount or degree.

Constraints

Restrictions or limitations on the variables of a problem which define the conditions or boundaries within which a solution must be found.

Experimental Statistical Study

A research method involving the manipulation of one variable to determine if changes in one variable cause changes in another variable.

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An infectious disease caused by the bacterium Vibrio cholerae, leading to severe diarrhea and dehydration.