# Suppose A Typical Basket Of Goods And Services Consists

39. Suppose a typical basket of goods and services consists of 4 units of housing and 7 units of food. In the United States a unit of housing costs 2 U. S. dollars and a unit of food costs one U. S. dollar, in Canada these prices are 3 Canadian dollars and 2 Canadian dollars, respectively. If the current exchange rate is 1. 5 Canadian dollars per U. S. dollar, what is the purchasing power parity exchange rate?a) 1. 3 \$C/\$US or less b) more than 1. 3 \$C/\$US but not more than 1. 5 \$C/\$USc) more than 1. 5 \$C/\$US but not more than 1. 7 \$C/\$US d) more than 1. 7 \$C/\$US40. Suppose the American and Canadian economies are in equilibrium with a fixed exchange rate of 1. 3 \$C/\$US and a common inflation rate of 5 percent. If the U. S. increases its money growth rate by two percentage points, when these economies have settled to their new mutual equilibrium the exchange rate (\$C/\$US)a) will be unchanged in both nominal and real termsb) will be unchanged in nominal terms but higher in real termsc) will be unchanged in nominal terms but lower in real termsd) will be unchanged in real terms but lower in nominal terms41. Suppose the American and Canadian economies are in equilibrium with a flexible exchange rate of 1. 3 \$C/\$US and a common inflation rate of 5 percent. If the U. S. increases its money growth rate by two percentage points, when these economies have settled to their new mutual equilibrium the exchange rate (\$C/\$US)a) will be unchanged in both nominal and real termsb) will be unchanged in nominal terms but lower in real termsc) will be unchanged in real terms but higher in nominal termsd) will be unchanged in real terms but lower in nominal terms