-Refer to the above diagram where D and S are Canada's demand for and supply of Swiss francs.At the equilibrium exchange rate,E,Canada's balance of payments is in equilibrium.Under a system of fixed exchange rates,the shift in demand from D to D' will cause:
A) Canada to increase its stocks of international monetary reserves.
B) a Swiss balance of payments deficit.
C) a Canadian balance of payments deficit.
D) a Canadian balance of payments surplus.

Question

-Refer to the above diagram where D and S are Canada's demand for and supply of Swiss francs.At the equilibrium exchange rate,E,Canada's balance of payments is in equilibrium.Under a system of fixed exchange rates,the shift in demand from D to D' will cause:
A) Canada to increase its stocks of international monetary reserves. 
B) a Swiss balance of payments deficit. 
C) a Canadian balance of payments deficit. 
D) a Canadian balance of payments surplus.

Quizplus · Accepted Answer

Under a fixed exchange rate system, an increase in demand for Swiss francs (shift from D to D') without a corresponding increase in supply will lead to a balance of payments deficit for Canada, as it will need to use its reserves to maintain the fixed exchange rate.

-Refer to the Above Diagram Where D and S Are