If the rate of inflation in Canada exceeds the rate of inflation in Great Britain, we would expect the Canadian dollar to depreciate in value against the British pound.

Question

Quizplus · Accepted Answer

If the rate of inflation in Canada exceeds the rate of inflation in Great Britain, it means that prices are increasing at a faster rate in Canada than in Great Britain. As a result, the goods and services produced in Canada become relatively more expensive than those produced in Great Britain. This reduces the demand for Canadian goods and services and weakens the demand for Canadian dollars. Accordingly, the exchange rate of the Canadian dollar tends to depreciate against the British pound.

If the Rate of Inflation in Canada Exceeds the Rate