Suppose Interest Rates Fall Sharply in Canada but Are Unchanged

question 129

Multiple Choice

Suppose interest rates fall sharply in Canada but are unchanged in Great Britain.Other things unchanged, under a system of flexible exchange rates we can expect the demand for pounds in Canada to:

• A)decrease, the supply of pounds to increase, and the dollar to appreciate relative to the pound.
• B)increase, the supply of pounds to increase, and the dollar may either appreciate or depreciate relative to the pound.
• C)increase, the supply of pounds to decrease, and the dollar to depreciate relative to the pound.
• D)decrease, the supply of pounds to increase, and the dollar to depreciate relative to the pound.

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