Suppose the Price Level in Canada Was P = 124

Essay

Suppose the price level in Canada was P = 124 last year; it is up by 3 points this year. In the U.S., the price level was 112 last year; it is up by 2 points this year. The exchange rate was US$0.96 per C$1 last year. (For part a, approximate all results to two decimals.)
a) Compare the rate of change in the exchange rate with the difference between the foreign and domestic inflation rates. Are they equal?
b) In theory, the rate of change in the nominal exchange rate should be about the same as the inflation difference. Redo the calculations from part a, retaining this time at least four decimals in your intermediate results. Does your answer to the question in part a change?
c) What have you learned from this exercise?