Question

In: Economics

Indicate whether each of the following creates a demand for, or a supply of, Canadian dollars...

Indicate whether each of the following creates a demand for, or a supply of, Canadian dollars in foreign exchange markets. Indicate the direction of the shift and whether the shift results in the Canadian dollar appreciating or depreciating. a. An increase occurs in the demand for foreign goods by Canadian citizens. b. A decrease occurs in the demand for Canadian goods by foreigners. c. Due to high household debt loads, Canadians decrease their amount of international travel. d. There is an increase in the world demand for oil and natural resources that Canada produces.

Solutions

Expert Solution

Below are the effects of each of the following events on the value of Canadian Dollar:

A.

Demand or Supply effect on Canadian dollar (CAD): Increase in the demand of foreign goods will lead to increase in the supply of Canadian dollars which will be used to import foreign goods. Hence Supply of CAD will increase.

Direction and effect of curve shifting: CAD Supply curve will shift rightwards and it will lead to depreciation of CAD.

B.

Demand or Supply effect on Canadian dollar: Reduction in the demand of Canadian exports will lead to lower demand of CAD which are required to buy Canadian goods. Hence Demand of CAD will decrease.

Direction and effect of curve shifting: CAD Demand curve will shift leftwards and it will lead to depreciation of CAD.

C.

Demand or Supply effect on Canadian dollar: As Canadians are reducing foreign travel, this will lead to less demand of foreign currency by them. This reduced foreign currency demand will lead to reduced supply of CAD as otherwise this CAD will be used to buy foreign currency. Hence Supply of CAD will decrease.

Direction and effect of curve shifting: CAD supply curve will shift leftwards which will lead to CAD appreciating.

D.

Demand or Supply effect on Canadian dollar: As demand for Canadian exports has increased this will lead to increase in demand of CAD in the foreign exchange markets. Hence Demand of CAD will increase.

Direction and effect of curve shifting: Due to increase in demand of CAD this will lead to CAD demand curve shifting rightwards. Therefore CAD will appreciate.

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Rahul Sunny answered 2 years ago
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