If Canadian policy-makers wish to maintain the value of the dollar relative to the U.S.dollar,what should they do?
A)Keep the money supply constant
B)Continually adjust the money supply to keep interest rates in line with American rates
C)Increase the money supply whenever the U.S.dollar starts to appreciate against the Canadian dollar
D)Purchase American dollars

Question

Quizplus · Accepted Answer

The maintenance of a constant money supply would keep the value of the Canadian dollar relatively stable in relation to the US dollar. Adjusting the money supply to keep interest rates in line with the US could cause fluctuations and instability in the value of the Canadian dollar. Increasing the money supply whenever the US dollar appreciates would lead to inflationary pressures and undermine the value of the Canadian dollar. Purchasing American dollars would deplete Canada's foreign reserves and could potentially trigger a currency war. Therefore, maintaining a constant money supply would be the best choice.

If Canadian Policy-Makers Wish to Maintain the Value of the Dollar