Which of the Following Best Explains the Relationship Among Price

question 159

Multiple Choice

Which of the following best explains the relationship among price levels, nominal and real exchange rates, and money supply in Canada and Ireland when purchasing power parity holds?

• A)When the price level in Canada falls more rapidly than that in Ireland, the real exchange rate, defined as Irish goods per unit of Canadian goods, stays the same.
• B)When the money supply in Canada rises more rapidly than in Ireland, the nominal exchange rate, defined as euros (the currency used in Ireland) per dollar, increases.
• C)When prices for the same goods are the same in Canadian dollars in Canada and Ireland, the nominal exchange rate does not change.
• D)When prices in both countries stay the same and the nominal exchange rate increases, the real exchange rate decreases.

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