Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What will happen to Canadian interest rates as a result of the leftward shift of the U.S. IS curve?
A) They will rise.
B) They will fall.
C) They will not change.
D) The IS curve will show an increase.

Question

Quizplus · Accepted Answer

If Canada pegs its dollar to the U.S. dollar at an exchange rate of $C1 = $US1, then Canadian interest rates will move in tandem with U.S. interest rates. A leftward shift of the U.S. IS curve signifies a decrease in the U.S. demand for Canadian goods and services. This will decrease Canadian output and demand for money, resulting in a fall in Canadian interest rates.

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