If the Exchange Rate Between the Canadian Dollar and the Mexican

question 1

Multiple Choice

If the exchange rate between the Canadian dollar and the Mexican peso (pesos per Canadian dollar) is less than the relative purchasing power between the two countries, which of the following would be true?

• A)There are opportunities for profit by purchasing goods in Canada and then selling them in Mexico.
• B)Purchasing power parity predicts that the value of the Canadian dollar will fall as traders take advantage of arbitrage opportunities.
• C)Purchasing power parity predicts that the Canadian dollar is overvalued as traders take advantage of arbitrage opportunities.
• D)There are no arbitrage opportunities that traders can take advantage of.
• E)There are opportunities to profit by borrowing in Canada and lending in Mexico.

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Definitions:

Budget Line

A graphical representation showing all possible combinations of two goods that can be purchased with a given budget at fixed prices.

Money Income

The total amount of monetary earnings received by an individual or household over a specific time period.

Purposeful Behavior

Actions taken with a specific goal in mind, driven by intentions and often linked to rational decision-making.

Production Possibilities Curve

A graphical representation showing the maximum number of goods or services that can be produced with a given set of resources and technology.