1. What will likely to happen to exchange rates involved in the following cases?
ID: 1201786 • Letter: 1
Question
1. What will likely to happen to exchange rates involved in the following cases?
a) a fall in the Canadian interest rate relative to interest rates abroad (dollar).
b) higher inflation rate in Japan compared other countries (yen).
c) A severe recession in Europe (euro).
d) Canada imposses a 15% tariff on Japanese imported cars (dollars).
2. Assume the Canada has a fixed exchange rate regime. Explain the effect on the foreign market if there is a decrease in foreign icome. What will the Bank of Canada do to maintain the fixed exchange rate?
Explanation / Answer
1.a. then investors may prefer to deposit in US banks to get more return from their funds. so, dollar price become stronger and canadian dollar will become weaker.
b. people will convert the currency into other currencies and invest in other nations or purchase with other currencies than YUAN, YUAN will become more cheaper than earlier.
c. no firm shown interest to invest in Euro zone and the EURO currency will lose its weight in market.
d. the demand for US dollars will increas
2. no, in this case they will go for floating exchange rates. because when fixed exchange rates not providing desired results, it is better to go for floating interest. it is the best alternative.
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