If the purchasing power of the dollar is always the same at home and abroad, then the nominal exchange rate defined as foreign goods per unit of Canadian goods decreases if the Canadian price level rises more than the price level in foreign countries.

Question

Quizplus · Accepted Answer

If the purchasing power of the dollar is always the same at home and abroad, then the law of one price holds. In other words, if the Canadian price level rises more than the price level in foreign countries, then Canadian goods become relatively more expensive compared to foreign goods. Hence, the nominal exchange rate defined as foreign goods per unit of Canadian goods decreases.

If the Purchasing Power of the Dollar Is Always the Same