Holding other things constant,a decrease in the inflation rate in the US compared to the Canadian economy will cause the demand for the Canadian dollar to _____________ and the supply to __________.

Question

Holding other things constant,a decrease in the inflation rate in the US compared to the Canadian economy will cause the demand for the Canadian dollar to _____________ and the supply to __________.​

Quizplus · Accepted Answer

If the inflation rate in the US decreases compared to that of Canada, the purchasing power of the US dollar increases relative to the Canadian dollar. This makes US goods relatively cheaper, which causes Canadians to demand more US goods and less Canadian goods, leading to a decrease in demand for the Canadian dollar. At the same time, as the US dollar becomes more appealing to investors due to its increased purchasing power, there will be an increase in the supply of US dollars in the foreign exchange market, thereby increasing the supply of Canadian dollars. Thus, the demand for the Canadian dollar will decrease, and the supply will increase.

Holding Other Things Constant,a Decrease in the Inflation Rate in the US