Consider two economies, Canada and the U.S. Canada is a small open economy and exchange rate is quoted as the number of U.S. $ per C$, i.e., EUS$/C$. a) Suppose at the current exchange rate, Canada has a balance of payments deficit. If Canada adopts a flexible exchange rate, what happens to the US$/C$ exchange rate? Explain in words with the aid of a supply-demand diagram for C$ (Be sure to identity what happens before and after the adjustment on your diagram) b) After the adjustment mentioned in part (a), the foreign exchange market is in equilibrium. Suppose there is a change in the consumption preference such that households in both Canada and the U.S. want to consume more American goods. What happens to the US$/C$ exchange rate? What happens to Canada's BOP? Explain with the aid of another supplydemand diagram for C$, and be sure to discuss the adjustment in the BOP (i.e., what happens to different components of the BOP) 2:16 pm

Consider two economies, Canada and the U.S. Canada is a small open economy and exchange rate is quoted as the number of U.S. $ per C$, i.e., EUS$/C$. a) Suppose at the current exchange rate, Canada has a balance of payments deficit. If Canada adopts a flexible exchange rate, what happens to the US$/C$ exchange rate? Explain in words with the aid of a supply-demand diagram for C$ (Be sure to identity what happens before and after the adjustment on your diagram) b) After the adjustment mentioned in part (a), the foreign exchange market is in equilibrium. Suppose there is a change in the consumption preference such that households in both Canada and the U.S. want to consume more American goods. What happens to the US$/C$ exchange rate? What happens to Canada's BOP? Explain with the aid of another supplydemand diagram for C$, and be sure to discuss the adjustment in the BOP (i.e., what happens to different components of the BOP) 2:16 pm

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter29: International Finance

Section: Chapter Questions

Problem 8P

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Question

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Consider two economies, Canada and the
U.S. Canada is a small open economy and
exchange rate is quoted as the number of U.S.
$ per C$, i.e., EUS$/C$.
a) Suppose at the current exchange rate,
Canada has a balance of payments deficit.
If Canada adopts a flexible exchange rate,
what happens to the US$/C$ exchange
rate? Explain in words with the aid of a
supply-demand diagram for C$ (Be sure to
identity what happens before and after the
adjustment on your diagram)
b) After the adjustment mentioned in
part (a), the foreign exchange market is in
equilibrium. Suppose there is a change in the
consumption preference such that households
in both Canada and the U.S. want to consume
more American goods. What happens to
the US$/C$ exchange rate? What happens
to Canada's BOP? Explain with the aid of
another supplydemand diagram for C$, and be
sure to discuss the adjustment in the BOP
(i.e., what happens to different components of
the BOP)
2:16 pm

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