Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. Now suppose that the increase in the price of oil in the second half of 2007 causes the IS curve in the United States to shift to the left. If all other things remain unchanged, what will happen to U.S. interest rates?
A) They will rise.
B) They will fall.
C) They will not change.
D) They will rise dramatically.

Question

Quizplus · Accepted Answer

If the IS curve shifts to the left, it means that there is less demand for goods and services in the economy. This will lead to a decrease in output and employment, which will in turn lead to a decrease in the demand for money. As a result, the Federal Reserve will lower interest rates to stimulate borrowing and investment, which will help to boost the economy. Therefore, U.S. interest rates will fall.

Suppose That Canada Decides to Peg Its Dollar ($C, or the Loonie)