At Time 0 the spot rate between the U.S. dollar and the Canadian dollars was at parity (US$1.00 = CAN$1.00).From Time 0 to Time 1 the inflation rate was 0% in the U.S. and 4% in Canada.Based on the theory of Relative PPP, the spot exchange rate between the U.S. dollars and the Canadian dollars at Time 1 should be approximately_____________.

a.US$1.00=CAN$1.04

b.CAN$1.00=US$1.04

c.US$1.00=CAN$0.96

d.CAN$1.00=US$1.00

The spot rate between the Japanese yen and the U.S. dollar was 265.83 yen/$ in 1973, when the Breton Woods system collapsed, and 143.35 yen/$ in 1989.The U.S. CPI moved from 40.3 in 1973 to 117.2 in 1989, while the Japanese CPI moved from 44.0 in 1973 to 104.6 in 1989.According to PPP, was the dollar overvalued or undervalued with respect to the Japanese yen?By how much?

a.The dollar was undervalued; by approximately52%

b.The dollar was overvalued; by approximately52%.

c.The dollar undervalued; by approximately34%.

d.The dollar overvalued; by approximately34%

The real exchange rate provides a measure of _____________.

a.price of one currency in terms of another currency.

b.percentage changes of the exchange rate.

c.how the nominal exchange rate is affected by inflation rates.

d.price competitiveness of domestic goods versus foreign goods.