Assume the U. S. dollar and the Canadian dollar are traded in flexible currency markets.

Which of the following would cause the U. S. dollar to depreciate relative to the Canadian dollar?

A. Higher price level in Canada relative to the United States.

B. Higher interest rates in the United States relative to Canada.

C. Lower interest rates in the United States relative to Canada.

D. Decreasing GDP in the United States than in Canada.

E. Increasing GDP in Canada relative to the United States.

Question

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Frisco

16 June, 08:19

Assume the U. S. dollar and the Canadian dollar are traded in flexible currency markets.

Which of the following would cause the U. S. dollar to depreciate relative to the Canadian dollar?

A. Higher price level in Canada relative to the United States.

B. Higher interest rates in the United States relative to Canada.

C. Lower interest rates in the United States relative to Canada.

D. Decreasing GDP in the United States than in Canada.

E. Increasing GDP in Canada relative to the United States.

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Answers (1)

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Teddy · Answer 1

B. Higher interest rates in the United States relative to Canada.

D. Decreasing GDP in the United States than in Canada.

Explanation: A flexible currency market is market where the exchange rate is determined by some economic factors which includes

High interest rate - if the interest rate on the United States is higher than that in Canada most investors will be moved to Borrow money from Canada instead of Borrowing from United States leading to reduced demand for The United States dollar which will lead to depreciation of the United States Dollar.

Decreasing GDP - when the gross domestic product of the United States economy decreases the general productivity level in the United States is decreased which will discourage foreign investors from investing in the United States leading to reduced demand for the United States Dollar.