The direct impact on Canadian inflation of an exchange rate depreciation occurs because higher prices of imports to Canada are inflationary.

Question

Quizplus · Accepted Answer

A depreciation in the exchange rate leads to higher prices of imports to Canada, which in turn leads to higher inflation. This is because Canadian consumers must pay more for these imports, which increases the overall cost of goods and services. This is a direct impact on inflation as it directly affects the prices of goods and services consumed in Canada.

The Direct Impact on Canadian Inflation of an Exchange Rate