Refer to the diagram below where D and S are Canada's demand for and supply of pesos.At the equilibrium exchange rate, E, Canada's balance of payments is in equilibrium.Under a system of flexible exchange rates, the shift in demand from D₁ to D₂ will: A)ultimately cause Canadian exports to decline and its imports to rise. B)cause the dollar price of pesos to increase. C)cause the peso to depreciate. D)cause the dollar to depreciate.

Question

Quizplus · Accepted Answer

The shift in demand from D₁ to D₂ indicates an increase in demand for pesos, which will increase the exchange rate. As a result, the peso will appreciate, making Canadian exports more expensive and less competitive in the global market. This will cause Canadian exports to decline and imports to rise, leading to a decrease in the balance of payments. Therefore, the correct choice is C.

Refer to the Diagram Below Where D and S Are