If Canada runs a trade surplus with Mexico, and exchange rates are floating, then

Question

Quizplus · Accepted Answer

A trade surplus with Canada means that Mexico is exporting more goods to Canada than it is importing from Canada. This will lead to an increase in demand for Canadian dollars in the foreign exchange market, causing the peso to depreciate relative to the Canadian dollar. Since the Canadian dollar and U.S. dollar are closely correlated, the peso will also depreciate relative to the U.S. dollar. Therefore, option A is the best choice. Option B is incorrect because it suggests that the dollar will depreciate relative to the peso, which is not the case. Options C and D are also incorrect because a trade surplus between two countries will only affect the exchange rate between their respective currencies, not the prices of all foreign goods for Canadians.

If Canada Runs a Trade Surplus with Mexico, and Exchange