To complete this task, you will need the following data:

1. the rate of inflation in Canada for Calendar Year (CY) 2018;
2. the U.S. rate of inflation for CY 2018;
3. the spot exchange rate for the Canadian dollar per U.S. dollar on January 1, 2018; and
4. the spot exchange rate for the Canadian dollar per U.S. dollar on December 31, 2018.

1. Use relative purchasing power parity to backcast, which is the opposite of to forecast, the rate of depreciation of the nominal exchange rate between the Canadian dollar per U.S. dollar for the period January 1, 2018 to December 31, 2018.

2. How much of the depreciation/appreciation of the Canadian dollar does the inflation differential explain?

3. Which violations, if any, of the assumptions of the theory of purchasing power parity would explain the failure of the inflation differential to explain 100 percent of the rate of depreciation of the nominal exchange rate?