Given floating exchange rates, a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a(n)
A) appreciation of the pound against the dollar.
B) depreciation of the pound against the dollar.
C) unchanged pound/dollar exchange rate.
D) appreciation of both the pound and dollar.

Question

Quizplus · Accepted Answer

A decrease in demand for British products means that Canadians will need fewer pounds to purchase these products, leading to a decrease in the demand for pounds and a depreciation of the pound. An increase in the British desire to invest in Canadian government securities means that they will need more Canadian dollars to do so, increasing the demand for Canadian dollars and further depreciating the pound. Therefore, the pound would depreciate against the Canadian dollar and likely against other currencies as well, including the U.S. dollar.

Given Floating Exchange Rates, a Simultaneous Decrease in the Canadian