Suppose the Price Level in Canada Was P = 124

question 198

Essay

Suppose the price level in Canada was P = 124 last year and it is up by 3 points this year. In the U.S., the price level was 112 last year and it is up by 2 points this year. The exchange rate was US$0.96 per C$1 last year. (For the following calculations, approximate all results to two decimals.)
a. Calculate the inflation rates in Canada and the U.S.
b. Calculate the real exchange rate at the beginning of the period.
c. Calculate the nominal exchange rate at the end of the period, assuming that the real exchange rate has not changed.
d. Compare the rate of change in the exchange rate with the difference between the foreign and domestic inflation rates. Are they equal?

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