According to the Purchasing Power Parity Theory, a Rise in Canada

question 36

Multiple Choice

According to the purchasing power parity theory, a rise in Canada price level of 5 percent, and a rise in the Mexican price level of 6 percent cause ________.

• A) the dollar to appreciate 1 percent relative to the peso
• B) the dollar to depreciate 1 percent relative to the peso
• C) the dollar to depreciate 5 percent relative to the peso
• D) the dollar to appreciate 5 percent relative to the peso

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Definitions:

Excess Return

The return on an investment above the return of a benchmark or risk-free rate.

Treasury-bill Rate

The interest rate determined by the market for U.S. Treasury bills, which are short-term government securities.

Continuous Compounding

The process whereby interest earned is immediately reinvested to earn more interest, theoretically occurring an infinite number of times per period.

APR

Annual Percentage Rate, the annual rate charged for borrowing or earned through an investment, accounting for compounding.