The Next Questions Refer to the Following

question 39

Multiple Choice

The next questions refer to the following.
During a common base period, a basket of goods costs C$14,700 in Canada and US$10,000 in the US.
-If,in the following year,Canada experiences 5% inflation while the US experiences 3% inflation,purchasing power parity theory predicts that

• A) the US dollar will appreciate until US$1 = C$1.50
• B) the Canadian dollar will appreciate by 2% against the US dollar
• C) in the long run, the nominal value of a US dollar will equal one Canadian dollar
• D) in the long run, the real trade-weighted exchange rate will be C$2 = US$3
• E) the Canadian dollar will depreciate indefinitely, until the currency is worthless