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Answer (B) is correct . Ruritanian inflation is worse than Canadian inflation, so the Canadian dollar will experience a net appreciation. Dividing the Ruritanian inflation factor of 1.10 by the Canadian factor of 1.05 and subtracting 1 results in a net gain of Canadian purchasing power of 4.76%.

Answer (A) is incorrect because Inflation affects exchange rates by diminishing a currency’s purchasing power.
Answer (C) is incorrect because Ruritanian inflation is worse than Canadian inflation, so the Canadian dollar will experience a net appreciation.
Answer (D) is incorrect because Ruritanian inflation is worse than Canadian inflation, so the Canadian dollar will experience a net appreciation.