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 will cause an increase in the quantity of pesos demanded and a decrease in the quantity of pesos supplied, leading to a depreciation of the peso. This means that it will become cheaper for Canadians to buy pesos and more expensive for Mexicans to buy Canadian dollars, which could lead to an increase in Canadian exports and a decrease in imports. However, this is not guaranteed as it depends on other factors such as the elasticity of demand and supply for goods between the two countries.

Refer to the Diagram Below Where D and S Are