Suppose Canada's central bank fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free market equilibrium exchange rate would otherwise be Cdn$1.05,then

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If the free market equilibrium exchange rate is Cdn$1.05 and the central bank fixes the exchange rate between Cdn$1.10 and Cdn$1.20, then the Canadian dollar is relatively overvalued. This would mean that Canadians would want to buy more American goods and services, while Americans would want to buy fewer Canadian goods and services. This would result in a net outflow of Canadian dollars from the country, putting downward pressure on the value of the Canadian dollar. To maintain the fixed exchange rate, Canada's central bank would need to buy U.S. dollars to supply the domestic demand for dollars. This would lead to a decrease in the supply of Canadian dollars, which would put upward pressure on its value, helping to maintain the fixed exchange rate.

Suppose Canada's Central Bank Fixes the Canada-U