Suppose Canada imposes an import quota on steel. Which of the following describes the most likely effects of this quota?
A)Canadian exports would increase, the real exchange rate of the Canadian dollar would appreciate, and Canadian net capital outflow would increase.
B)Canadian exports would increase, the real exchange rate of the Canadian dollar would depreciate, and Canadian net capital outflow would remain unchanged.
C)Canadian exports would decrease, the real exchange rate of the Canadian dollar would appreciate, and Canadian net capital outflow would remain unchanged.
D)Canadian exports would decrease, the real exchange rate of the Canadian dollar would depreciate, and Canadian net capital outflow would decrease.

Question

Quizplus · Accepted Answer

When Canada imposes an import quota on steel, it will decrease the supply of steel in the Canadian market. This will increase the price of steel, and Canadian consumers will shift their demand to either domestically produced steel or substitute products that are cheaper. This means that the demand for imported steel will decrease, reducing Canada's imports. Thus, Canadian exports would decrease.

Regarding the effects on the exchange rate and net capital outflow, the import quota will increase the demand for Canadian dollars because Canadian importers now have to buy more Canadian dollars to pay for the reduced imports. This increased demand for Canadian dollars will lead to an appreciation of the Canadian dollar’s exchange rate.

However, the quota will not affect Canadian net capital outflow since it does not directly influence international borrowing or lending. Therefore, Canadian net capital outflow would remain unchanged.

Suppose Canada Imposes an Import Quota on Steel