1) The theory of PPP suggests that if one country"s price level rises relative to another"s, its currency should

A) depreciate in the long run.

B) appreciate in the long run.

C) depreciate in the short run.

D) appreciate in the short run.

2) In the long run, a rise in a country"s price level (relative to the foreign price level) causes its currency to ________, while a fall in the country"s relative price level causes its currency to ________.

A) appreciate; appreciate

B) appreciate; depreciate

C) depreciate; appreciate

D) depreciate; depreciate

3) If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will

A) rise by 6 percent.

B) rise by 2 percent.

C) fall by 6 percent.

D) fall by 2 percent.