Suppose the Price Level in Canada Increases from P₁ to P₂

question 27

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:

Utility Function

An economic tool that describes how consumers rank different bundles of goods according to the level of satisfaction or utility those bundles provide.

Endowed

Provided with a large amount of a particular resource or quality.

Contract Curve

In economics, it represents the set of optimal points of exchange between two parties, where no further mutual benefit can be achieved through trade.

Edgeworth Box

A graphical representation of the trading possibilities and equilibrium between two individuals with fixed amounts of two goods.