Question

One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately:

Answer 1

Answer:

The correct answer to the following question will be "$1.04/C$1".

Explanation:

The given values are:

U.S's spot rate = $1/C$1

Rate of inflation = 4%

Now,

According to Relative PPP, As Canada will have lower unemployment or inflation, its currency would appreciation by the gap in society, thus by 4%.

Hence,

New rate = $1\times 1.04$

                = $1.04/C$$$1$