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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Definitions:

Narcissistic Trait

A personality characteristic involving an inflated sense of self-importance, need for admiration, and lack of empathy for others.

Oedipus Complex

The Oedipus complex is a concept in psychoanalytic theory referring to a child's unconscious sexual desire for the opposite-sex parent and jealousy and rivalry toward the same-sex parent.

Reality Principle

A psychoanalytic concept that refers to the ability of the ego to address the demands of the environment in a realistic manner, balancing the id's desires with the external world's constraints.

Unconscious Wishes

Desires or longings that an individual is not aware of but that influence emotions and behavior, according to psychoanalytic theory.