If the U.S. puts tariffs on Canadian-manufactured products and Canada has a flexible exchange, which of the following will occur?
A) Canadian interest rates will initially rise above the world interest rate
B) there will be no permanent effects on Canada's aggregate demand curve
C) Canadian net exports will increase in the long run
D) the Canadian dollar will permanently appreciate

Question

Quizplus · Accepted Answer

A flexible exchange rate allows for currency depreciation, which can offset the effects of tariffs on exports. Therefore, there will be no permanent effects on Canada's aggregate demand curve. Option A is incorrect because interest rates may rise temporarily due to changes in capital inflows and outflows, but it is not a long-term effect. Option C is incorrect because tariffs typically lead to a decrease in net exports, not an increase. Option D is incorrect because a depreciation of the Canadian dollar may occur in response to tariffs, but it is not permanent.

If the US Puts Tariffs on Canadian-Manufactured Products and Canada Has a Has