Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

Question

Quizplus · Accepted Answer

If the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target, it would lead to contractionary policy, such as raising interest rates. This would cause investors to move their funds to the Euro-Zone, hence reducing the demand for Canadian assets. Therefore, the demand for Canadian assets would decrease, and the Canadian dollar will depreciate.

Suppose a Report Was Released Today That Showed the Euro-Zone