Question

Suppose Americans suddenly develop a strong taste for Canadian whiskey. What happens to the demand for Canadian dollars in the foreign exchange market? What happens to the value of Canadian dollars in the foreign exchange market? What about U.S. dollars? What happens to the quantity of net exports in Canada, other than whiskey, as a result of your answer in part b? What about the U.S.?

Answer 1

Answer:

A) If there is a sudden spike in the demand for Canadian Whiskey, the demand for Canadian Dollars will shoot upwards in the FX market.

B) When the demand for Canadian dollars does up in the FX market, the forces of demand and supply will force its price to increase in relation to the dollar.

C) If America is not exporting any commodity, or the number of Canadian goods imported into America is less than what it shipped out to them, then there is a trade deficit. Trade deficits if sustained can lead to a weaker currency.

D) Because the export demand for Canadian Whiskey has taken an upward spiral, the number of net exports in Canada will increase. When this happens, the currency is strengthened and so is the Canadian dollar. When the strength of a currency increases, it automatically gives more purchasing power to those holding that currency.

When compared to the U.S. with a consistently lowered net export, the dollar is likely to depreciate in value, thus eroding the spending or purchasing power of the U.S. dollar.

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