Suppose Inflation Is Higher in Canada Over the Next Few

Multiple Choice

Suppose inflation is higher in Canada over the next few months than in foreign countries, and exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods Canadian goods buy. According to purchasing-power parity, which of the following should we expect to see?

A) Only the nominal exchange rate depreciates.
B) Both the real and nominal exchange rates appreciate.
C) Both the real and nominal exchange rates depreciate.
D) Only the real exchange rate appreciates.