Refer to the above diagram where D and S are Canada's demand for and supply of Swiss francs.At the equilibrium exchange rate, E, Canada's balance of payments is in equilibrium.Under a system of fixed exchange rates, the shift in demand from D to D' will cause:

Question

Quizplus · Accepted Answer

A shift in demand from D to D' implies an increased demand for Swiss francs by Canada. Under a fixed exchange rate system, the central bank of Canada must intervene in the foreign exchange market by purchasing Swiss francs to maintain the fixed exchange rate. This will lead to a decrease in Canada's international reserves and a balance of payments deficit. On the other hand, there is no information to suggest that there will be a Swiss balance of payments deficit (choice B) or a Canadian balance of payments surplus (choice D) as a result of this shift in demand.

Refer to the Above Diagram Where D and S Are