Under a system of flexible (floating)exchange rates,a higher Canadian trade deficit with Mexico will tend to cause:
A)the Canadian government to ration pesos to Canadian importers
B)a flow of gold from Canada to Mexico
C)an increase in the price of Canadian dollars, in terms of Mexican pesos
D)a decrease in the price of Canadian dollars, in terms of Mexican pesos
E)a flow of gold from Mexico to Canada

Question

Quizplus · Accepted Answer

Under a system of flexible (floating) exchange rates, a higher Canadian trade deficit with Mexico implies that Canadians are buying more Mexican goods than Mexicans are buying Canadian goods. This increases the demand for Mexican pesos and decreases the demand for Canadian dollars. As a result, the value of the Canadian dollar decreases in terms of Mexican pesos.

Under a System of Flexible (Floating)exchange Rates,a Higher Canadian Trade