Suppose the Real Exchange Rate X Between Canada and the U.S

question 94

Essay

Suppose the real exchange rate X between Canada and the U.S. is constant. Let the price level in Canada be P, the price level in the U.S. be P*, and the nominal exchange rate be
e. Suppose the price level in Canada increases from P1 to P2 and the price level in the U.S. increases from P1* to P2*. Show that the rate of change in e, which is equal to (e2 - e1)/e1 × 100 is approximately equal to the difference in the inflation rates in the two countries. Note that the nominal exchange rate is e = XP*/P. What have you learned from this exercise?

---

Definitions:

Writing

Writing in a research context refers to the process of composing text that communicates research findings, analyses, and arguments clearly and effectively.

Display Panel

A flat surface or screen, typically electronic, used for showing textual or graphical information to users.

News Media

The section of the media specifically designed and dedicated to the reporting and dissemination of news across a variety of platforms.

Scholarly Research

A systematic investigation or study conducted to increase knowledge in a field, employing rigorous methodologies.