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

Select one:

A.

have no effect on the nominal exchange rates.

B.

be completely offset by changes in the real exchange rate.

C.

be completly 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.