Refer to the graph. Higher inﬂation in the United States relative to that in Canada, ceteris paribus, will cause a(n)
A) decrease in the supply of U.S. dollars.
B) increase in the demand for U.S. dollars.
C) decrease in the value of the U.S. dollar in terms of the Canadian dollar.
D) increase in the value of the U.S. dollar in terms of the Canadian dollar.

Question

Refer to the graph. Higher inﬂation in the United States relative to that in Canada, ceteris paribus, will cause a(n)
A) decrease in the supply of U.S. dollars. 
B) increase in the demand for U.S. dollars. 
C) decrease in the value of the U.S. dollar in terms of the Canadian dollar. 
D) increase in the value of the U.S. dollar in terms of the Canadian dollar.

Quizplus · Accepted Answer

Higher inflation in the United States will cause a decrease in the value of the U.S. dollar in terms of the Canadian dollar because the purchasing power of the U.S. dollar will decrease. This will lead to a decrease in demand for U.S. dollars and an increase in demand for Canadian dollars, causing the value of the U.S. dollar to fall in relation to the Canadian dollar.

Refer to the Graph