For each of the following state a) if the demand or supply
curve will shift left or right, (b) the...

Question

For each of the following state a) if the demand or supply
curve will shift left or right, (b) the effect on the exchange rate, and (c) if
it is a long, medium, or short run effect based on the supply of and demand for
the Canadian dollar by the U.S. market and explain your reasoning.

a. more rapid growth in Canada than in the U.S
b. a rise in U.S. interest rates
c. goods are more expensive in Canada than the united states
d. a recession in the United states
e. expectation of future depreciation in the Canadian dollar

David · Accepted Answer

For each of the following state  
a) if the demand or supply curve will shift left or right, (b) the effect on the 
exchange rate, and (c) if it is a long, medium, or short run effect based on the 
supply of and demand for the Canadian dollar by the U.S. market and explain your 
reasoning.  
a. more rapid growth in Canada than in the U.S  
Answer: 
Because of relatively higher growth, Canadian economy is likely to have more 
investment opportunities than U.S and therefore foreign funds are likely to flow in 
Canadian economy, causing supply of dollar to increase in the economy and 
therefore causing supply of curve of U. S dollar in the Canadian economy to shift 
rightward. This would cause Canadian dollar/U.S dollar exchange rate to fall i.e. 
appreciation of Canadian dollar (or depreciation of US dollar).[Refer figure] 
Figure1:
b. a rise in U.S. interest rates  
Answer: 
A rise in the U.S interest rates means rise in the return on investment in U.S. So 
there will huge inflow of foreign capital (including Canadian dollar) in the United 
States. As a result, the supply of foreign currency (particularly Canadian dollar) 
would increase in the United States, shifting supply curve of foreign exchange 
rightward in the United States. At the same time,

For each of the following state a) if the demand or supply curve will shift left or right, (b) the effect on the exchange rate, and (c) if it is a long, medium, or short run effect based on the supply...

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