Refer to the Diagram Below

question 86

Multiple Choice

Refer to the diagram below. The initial demand for and supply of pesos are shown by D₁ and S₁. Suppose Canada reduces its imports of Mexican goods, shifting its demand for pesos from D₁ and D₂. If Canada was operating under a system of exchange controls that maintains the exchange rate at E, the Canadian government would:

• A) find that, at the controlled exchange rate, pesos would be in surplus.
• B) be faced with deteriorating terms of trade.
• C) be faced with the problem of rationing BG pesos to Canadian importers who want BF pesos.
• D) be faced with the problem of rationing BF pesos to Canadian importers who want BG pesos.

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