Chapter 43, Problem 2CYU

To determine

To find: The ways to use monetary policy under a floating exchange rate.

Explanation of Solution

The high Canadian interest rates caused an increase in capital inflows to country C. To get investments that yielded a relatively high-interest rate in country C, investors first had to obtain Canadian dollars, which increases the demand for the Canadian dollar, but this also causes it to appreciate or value to increase. This appreciation raises the price of Canadian goods to foreigners (measured in terms of foreign currency).

Therefore, this made it more difficult for Canadian firms to compete in other markets.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.