Suppose that Canada pegs its dollar to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to:
A) cause asymmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate.
B) cause symmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate.
C) cause asymmetric shocks to the U.S. and Canadian economies and make it easier for Canada to maintain the $C1 = $US1 exchange rate.
D) cause symmetric shocks to the U.S. and Canadian economies and make it difficult for Canada to maintain the $C1 = $US1 exchange rate.

Question

Quizplus · Accepted Answer

CThe increase in the price of oil would likely cause asymmetric shocks because the two countries have different economic structures, with Canada being a major oil exporter and the U.S. being a major oil importer. This could make it easier for Canada to maintain the peg due to increased foreign exchange earnings from oil exports, enhancing its ability to support the exchange rate.

Suppose That Canada Pegs Its Dollar to the U