Suppose the Price Level in Canada Increases from P1 to P2

question 173

Essay

Suppose the price level in Canada increases from P1 to P2, while the price level abroad (P*) and the nominal exchange rate (e) between the Canadian dollar and the foreign currency remain the same. Let the real exchange rate be X. What is the percentage change in the real exchange rate?

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Definitions:

Real Exchange Rate

The rate at which two currencies can be exchanged, adjusted for inflation, indicating how much of a country's goods and services can be exchanged for those of another country.

Prices Rise

An increase in the cost of goods and services in an economy over a period of time.

Purchasing-Power Parity

A theory that states prices of goods and services should equalize across countries when expressed in a common currency, accounting for exchange rates.

Money Supply

The grand total of money available in an economy at a specific time, encompassing cash, coins, and deposits in checking and savings accounts.