If Prices in the United States Rise Less Rapidly Than

question 72

Multiple Choice

If prices in the United States rise less rapidly than in Canada,which of the following would be expected according to purchasing power parity?

• A) The value of the Canadian dollar will decline, relative to the U.S. dollar.
• B) The value of the U.S. dollar will decline, relative to the Canadian dollar.
• C) Inflation in the U.S. will exceed inflation in Canada.
• D) The exchange rate will be unaffected by the price changes.

---

Definitions:

Utility Function

An economic model that measures preferences over a set of goods and services.

Budget Constraint

An economic model that represents all the combinations of goods and services a consumer can purchase given their income and the prices of those goods and services.

Bundle

A collection of goods or services that are sold together.

Marginal Rate of Substitution

The rate at which a consumer is willing to give up some amount of one good in exchange for another good while keeping the same level of utility.