Refer to the graph above. Higher inflation in the United States relative to that in Canada, ceteris paribus, will cause a(n):

Question

Quizplus · Accepted Answer

When inflation is higher in the United States relative to Canada, this means that the prices of goods and services in the US are increasing more rapidly than they are in Canada. As a result, US goods become relatively more expensive compared to Canadian goods. This means that Canadians will demand fewer US goods and switch to buying Canadian goods instead. This decreased demand for US goods will cause a decrease in the demand for US dollars, which in turn will cause a decrease in the value of the US dollar relative to the Canadian dollar, i.e., the exchange rate will fall. Therefore, the correct answer is C - a decrease in the value of the US dollar in terms of the Canadian dollar.

Refer to the Graph Above