Suppose that Canada imposes an import quota on steel. Which statement best describes the most likely effects of this quota?
A) The quota would cause the real exchange rate of Canadian dollars to appreciate, but it would not change the real interest rate in Canada.
B) The quota would cause the real exchange rate of Canadian dollars to appreciate and the real interest rate in Canada to increase.
C) The quota would cause the real exchange rate of Canadian dollars to depreciate and the real interest rate in Canada to decrease.
D) The quota would cause the real exchange rate of Canadian dollars to depreciate, but it would not change the real interest rate in Canada.

Question

Quizplus · Accepted Answer

Imposing an import quota on steel would likely reduce the supply of foreign steel in Canada, increasing demand for domestic currency to purchase domestic goods, leading to an appreciation of the real exchange rate of Canadian dollars. The effect on the real interest rate is not directly influenced by the quota.

Suppose That Canada Imposes an Import Quota on Steel