Suppose the Canadian central bank wants to keep the exchange rate of the Canadian dollar with the U.S. dollar constant over time. An increase in the demand for Canadian goods by American residents will lead the Canadian central bank to

Question

Quizplus · Accepted Answer

To keep the exchange rate constant in the face of increased demand for Canadian goods (and thus Canadian dollars), the Canadian central bank would increase the supply of Canadian dollars in the foreign exchange market. This action counteracts the upward pressure on the Canadian dollar's value by making more Canadian dollars available to meet the increased demand.

Suppose the Canadian Central Bank Wants to Keep the Exchange