If the exchange rate is above the equilibrium exchange rate in the foreign exchange market,
A)a shortage exists, and the exchange rate will rise.
B)a shortage exists, and the exchange rate will fall.
C)a surplus exists, and the exchange rate will fall.
D)exports are cheap, and the demand curve for Canadian dollars will shift rightward.
E)a surplus exists, and the exchange rate will rise.

Question

Quizplus · Accepted Answer

If the exchange rate is above the equilibrium exchange rate, it means that the domestic currency is overvalued and foreign currencies are undervalued. This leads to a surplus of domestic currency and a shortage of foreign currency in the foreign exchange market. As a result, the excess supply of domestic currency will push its price down, causing the exchange rate to fall until it reaches the equilibrium level. Therefore, choice C is the correct answer.

If the Exchange Rate Is Above the Equilibrium Exchange Rate