Reference no: EM133126382

The appropriate formula for the task described below is (3-2) on page 69 of your textbook.

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. In your answer, please provide references or links to your data sources.

Answer the following questions:

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. (show your calculation)

2. How much of the depreciation/appreciation of the Canadian dollar does the inflation differential explain? (show your calculation)

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? (provide a bullet list of these assumptions)