If exchange rates are floating,the Bank of Canada increasing its target inflation rate will cause the dollar to ________ relative to other currencies and cause net capital outflows to ________.
A) appreciate; increase
B) appreciate; decrease
C) depreciate; increase
D) depreciate; decrease

Question

Quizplus · Accepted Answer

If the Bank of Canada increases its target inflation rate, it will lead to an increase in interest rates which will make the domestic currency less attractive to foreign investors. As a result, there will be a decrease in net capital inflows and an increase in net capital outflows, which will lead to a depreciation of the domestic currency relative to other currencies.

If Exchange Rates Are Floating,the Bank of Canada Increasing Its