Question

Does positive value of x make economic sense and what is underlying economic theory

Answer 1

Solution:

The positive value of x does not make economic sense since we expect the CPI index of Canada to be negative, corresponding to the CPI index of the USA.

 

The underlying economic theory is the theory of purchasing power parity (PPP). If the inflation rate within a country (in our case, the United States) is higher than the inflation rate in Canada, the value of the national currency will tend to fall.