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© 2014 Pearson Canada Inc.#
If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent,
then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian
dollar in terms of Mexican pesos will ____.
A) rise by 6 percent
B) rise by 2 percent
C) fall by 6 percent
D) fall by 2 percent
Answer: D
Diff: 3 Type: MC Page Ref: 475
Skill: Applied
Objective List: 19.2 Identify the factors that lead to changes in the exchange rate in the long run
Assume that the following are the predicted inflation rates in these countries for the year: 2
percent for Canada, 3 percent for Canada; 4 percent for Mexico, and 5 percent for Brazil.
According to the purchasing power parity and everything else held constant, which of the
following would we expect to happen?
A) The Brazilian real will depreciate against the Canadian dollar.
B) The Mexican peso will depreciate against the Brazilian real.
C) The Canadian dollar will depreciate against the Mexican peso.
D) The Canadian dollar will depreciate against the Canadian dollar.
Answer: A
Diff: 3 Type: MC Page Ref: 474
Skill: Applied
Objective List: 19.2 Identify the factors that lead to changes in the exchange rate in the long run
According to the purchasing power parity theory, a rise in Canada price level of 5 percent,
and a rise in the Mexican price level of 6 percent cause ____.
A) the dollar to appreciate 1 percent relative to the peso
B) the dollar to depreciate 1 percent relative to the peso
C) the dollar to depreciate 5 percent relative to the peso
D) the dollar to appreciate 5 percent relative to the peso
Answer: A
Diff: 2 Type: MC Page Ref: 475
Skill: Recall
Objective List: 19.2 Identify the factors that lead to changes in the exchange rate in the long run
Higher tariffs and quotas cause a country's currency to ____ in the ____ run,
everything else held constant.
A) depreciate; short
B) appreciate; short
C) depreciate; long
D) appreciate; long
Answer: D
Diff: 1 Type: MC Page Ref: 475
Skill: Recall
Objective List: 19.2 Identify the factors that lead to changes in the exchange rate in the long run