Suppose the exchange rates between the United States and Canada are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S
and Canadian rates of inflation would A) have no effect on nominal exchange rates.
B) be completely offset by changes in the real exchange rate.
C) be completely offset by changes in the nominal exchange rate.
D) violate the conditions for the law of one price.
E) lead to a change in the real purchasing power of each country's currency when it is converted to the other country's currency.
C
You might also like to view...
In perfect competition, an individual firm
A) faces unitary elasticity of demand. B) has a price elasticity of supply equal to one. C) faces a perfectly elastic demand. D) has perfectly elastic supply.
Economists usually use the term "recession" to refer to:
a. any slowdown in the growth of real GDP. b. zero real GDP growth. c. two or more consecutive quarters of declining real GDP. d. a reduction in nominal GDP lasting more than six months.