How will an interest rate decrease in Canada affect equilibrium in the foreign exchange market?
A)The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined.
B)The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined.
C)The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase.
D)The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase.
E)The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded cannot be determined.

Question

Quizplus · Accepted Answer

A decrease in interest rates in Canada will decrease the demand for Canadian dollars, as investors will seek higher returns elsewhere. This will shift the demand curve for Canadian dollars to the left, causing a decrease in the equilibrium exchange rate. However, the effect on the equilibrium quantity of dollars traded cannot be determined as it depends on the relative magnitudes of the shifts in the demand and supply curves.

How Will an Interest Rate Decrease in Canada Affect Equilibrium