If the Canadian dollar was fixed and the demand for Canadian goods decreased, the Canadian dollar would become _____ and there would be a _____ of Canadian dollars in the international markets.Multiple choice question.undervalued; surplusovervalued; surplusundervalued; shortageovervalued; shortage
Question
If the Canadian dollar was fixed and the demand for Canadian goods decreased, the Canadian dollar would become _____ and there would be a _____ of Canadian dollars in the international markets.Multiple choice question.undervalued; surplusovervalued; surplusundervalued; shortageovervalued; shortage
Solution
If the demand for Canadian goods decreases, it means that less foreign currency is being exchanged for Canadian dollars. This would lead to an excess supply of Canadian dollars in the foreign exchange market, as the supply of Canadian dollars (from those selling Canadian goods) exceeds the demand for them (from those buying Canadian goods).
In a flexible exchange rate system, this would normally lead to a depreciation of the Canadian dollar. However, in this case, the Canadian dollar is fixed, meaning its value does not change in response to market conditions.
Therefore, the Canadian dollar would become overvalued, as it is worth more than what the market believes it should be worth based on supply and demand conditions.
And because the supply of Canadian dollars exceeds the demand, there would be a surplus of Canadian dollars in the international markets.
So, the answer is: overvalued; surplus.
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