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-(Figure: Change in Demand for Canadian Dollars) Refer to Figure: Change in the Demand for Canadian Dollars.The change from D₁ to D₂ will occur,all other things being equal,if:

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-(Figure: Change in Demand for Canadian Dollars) Refer to Figure: Change in the Demand for Canadian Dollars.The change from D₁ to D₂ will occur,all other things being equal,if:

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An increase in interest rates in Canada will make Canadian bonds more attractive relative to bonds denominated in other currencies, thus increasing demand for Canadian dollars and shifting the demand curve to the right from D₁ to D₂. Option A is incorrect because higher interest rates in Europe would decrease demand for Canadian dollars as investors would prefer to invest in Euro-denominated bonds. Option C is incorrect as it assumes interest rates are the same in both regions which is not the case according to the question stem. Option D is incorrect because inflation is not a determinant of demand for currency but rather affects the supply of that currency in the market.

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