An increase in income in the United States would have what effect on the equilibrium exchange rate and equilibrium quantity of Canadian dollars in the foreign exchange market?
A) decrease in the exchange rate and decrease in the quantity
B) decrease in the exchange rate and no effect on the quantity
C) increase in the exchange rate and decrease in the quantity
D) no change in the exchange rate and increase in the quantity
E) increase in the exchange rate and increase in the quantity

Question

Quizplus · Accepted Answer

An increase in income in the United States would likely lead to an increase in demand for Canadian goods and services, as Americans would have more money to spend. This would increase the demand for Canadian dollars in the foreign exchange market to pay for these goods and services, leading to an increase in the exchange rate of Canadian dollars (it becomes more expensive in terms of other currencies) and an increase in the quantity of Canadian dollars traded as more transactions occur.

An Increase in Income in the United States Would Have