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Canada is the United States’s biggest trading partner. This question looks at the effects different events...

  1. Canada is the United States’s biggest trading partner. This question looks at the effects different events on the exchange rate and U.S. net exports. For the following cases, describe the effects on net exports and the Cdn$/US$ exchange rate:

    (a) The Canadian economy goes into a recession but the American economy avoids a recession.

    (b) President Trump imposes a tariff on Canadian exports into the USA.

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Answer #1

A - Due to recession in Canada , the exports of Canada will fall. The fall in the exports will lead to the decrease in supply of forex into Canada. The supply curve will shift to left and hence the Exchange rate of Canada will rise with respect to US dollar . The currency of Canada will decline.

B - Due to the imposition of tariff , the export will decline . Hence the net export will also decline. Thus currency of US will become more expensive for Canada and exchange rate will increase.

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