Question
Which statement best explains the relationship among price levels, nominal and real exchange rates, and money supply in Canada and Ireland when purchasing-power parity holds?
Which statement best explains the relationship among price levels, nominal and real exchange rates, and money supply in Canada and Ireland when purchasing-power parity holds?
a. | When prices for the same goods are the same in Canadian dollars in Canada and Ireland, the nominal exchange rate does not change. | |
b. | When the price level in Canada falls more rapidly than that in Ireland, the real exchange rate, defined as Irish goods per unit of Canadian goods, stays the same. | |
c. | When the money supply in Canada rises more rapidly than in Ireland, the nominal exchange rate, defined as euros (the currency used in Ireland) per dollar, increases. | |
d. | When prices in both countries stay the same and the nominal exchange rate increases, the real exchange rate decreases. |
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