If the Canadian real exchange rate appreciates relative to the euro, which of the following best describes the consequences?
A)Canadian exports to Europe and European exports to Canada both rise.
B)Canadian exports to Europe and European exports to Canada both fall.
C)Canadian exports to Europe rise, and European exports to Canada fall.
D)Canadian exports to Europe fall, and European exports to Canada rise.

Question

Quizplus · Accepted Answer

If the Canadian real exchange rate appreciates relative to the euro, it means that the Canadian dollar has become stronger compared to the euro. As a result, Canadian exports become relatively more expensive for European consumers, so the demand for Canadian exports in Europe falls. On the other hand, European exports become relatively cheaper for Canadian consumers, so the demand for European exports in Canada rises. Therefore, Canadian exports to Europe fall, and European exports to Canada rise.

If the Canadian Real Exchange Rate Appreciates Relative to the Euro