Under a system of flexible exchange rates a Canadian trade deficit with Mexico will tend to cause:
A)the Canadian government to ration pesos to Canadian importers.
B)a flow of gold from Canada to Mexico.
C)an increase in the peso price of dollars.
D)an increase in the dollar price of pesos.

Question

Quizplus · Accepted Answer

A trade deficit occurs when a country is importing more goods and services than it is exporting. In a system of flexible exchange rates, the market will adjust the exchange rate to reflect the relative demand for currencies. As Canadians import more from Mexico, they will need to exchange Canadian dollars for Mexican pesos, increasing the demand for pesos and reducing the demand for Canadian dollars. This will cause the peso to appreciate relative to the Canadian dollar, which means that it will take more Canadian dollars to buy the same amount of pesos. Therefore, there will be an increase in the dollar price of pesos.

Under a System of Flexible Exchange Rates a Canadian Trade