Question

Consider the exchange rate between Ethiopia and Canada. Typically exchange rates vary over time, sometimes quite dramatically. The following list presents various changes that may affect the exchange rate. You must use the labels on the bottom to indicate whether the change will tend to cause an appreciation, depreciation, or have no effect, in the exchange rate of Ethiopian birr relative to Canadian dollars. The magazine The Economist publishes an article indicating that analysts expect the value of Canadian dollars to rise relative to Ethiopian birr. The central bank in Ethiopia announces that it is going to raise interest rates on government bonds. Based on a World Bank report, the inflation rate in Ethiopia is going to be 0% next year, while the inflation rate in Canada is going to be 10%. The price of a specific basket of goods in Ethiopia is roughly 1.9 times higher than an identical basket of goods in Canada, even after adjusting for the exchange rate.

Answer 1

Answer: Please refer to Explanation

Explanation:

The magazine The Economist publishes an article indicating that analysts expect the value of Canadian dollars to rise relative to Ethiopian birr.

-The Ethiopian Birr will DEPRECIATE in relation to the Canadian Dollar because the article will lead to a rise in demand for Canadian dollars and a drop in Demand for the Birr.

The central bank in Ethiopia announces that it is going to raise interest rates on government bonds.

-Ethiopian Birr will APPRECIATE relative to the CAD as the demand for the Birr will increase due to the attractiveness of it's bonds.

Based on a World Bank report, the inflation rate in Ethiopia is going to be 0% next year, while the inflation rate in Canada is going to be 10%.

- The Birr will APPRECIATE relative to the CAD because goods will be more expensive in Canada. This causes the demand for the Birr to rise as it is the preferred currency.

The price of a specific basket of goods in Ethiopia is roughly 1.9 times higher than an identical basket of goods in Canada, even after adjusting for the exchange rate.

- The Birr will DEPRECIATE relative to the CAD as a higher basket price indicates that the price is higher in Ethiopia than in Canada which will reduce the demand for the Birr increase that of the CAD.