Suppose new information leads people to expect future appreciation of the Canadian dollar. Then all of the following occurs except
A)the demand for dollars increases.
B)the supply of dollars decreases.
C)the current exchange rate rises.
D)the interest rate must rise.
E)none of the above

Question

Quizplus · Accepted Answer

When people expect future appreciation of the Canadian dollar, they will want to buy more Canadian dollars, leading to an increase in demand for dollars and a decrease in its supply. This will cause an increase in the current exchange rate. However, there is no direct relationship between the expected appreciation of the Canadian dollar and the interest rate, and thus the interest rate does not need to rise. Therefore, option D is the only one that does not occur.

Suppose New Information Leads People to Expect Future Appreciation of the Canadian