Assume that the Canadian dollar’s spot rate is $0.85 and that the Canadian and U.S. inflation rates are similar. Then assume that Canada experiences 4 percent inflation, whereas the United States experiences 3 percent inflation. According to PPP, what will be the new value of the Canadian dollar after it adjusts to the inflationary changes? (You may use the approximate formula to answer this question.)

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 8, Problem 4ST
Textbook Problem

Assume that the Canadian dollar’s spot rate is $0.85 and that the Canadian and U.S. inflation rates are similar. Then assume that Canada experiences 4 percent inflation, whereas the United States experiences 3 percent inflation. According to PPP, what will be the new value of the Canadian dollar after it adjusts to the inflationary changes? (You may use the approximate formula to answer this question.)

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