Assume that you believe exchange rate movements are mostly driven by purchasing power parity. The U.S. and Canada presently have the same nominal (quoted) interest rate. The central bank of Canada just made an announcement that causes you to revise your estimate of Canada's real interest rate upward. Nominal interest rates were not affected by the announcement. Do you expect that the Canadian dollar to appreciate, depreciate, or remain the same against the dollar in response to the announcement

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30-04-2021
Business

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Assume that you believe exchange rate movements are mostly driven by purchasing power parity. The U.S. and Canada presently have the same nominal (quoted) interest rate. The central bank of Canada just made an announcement that causes you to revise your estimate of Canada's real interest rate upward. Nominal interest rates were not affected by the announcement. Do you expect that the Canadian dollar to appreciate, depreciate, or remain the same against the dollar in response to the announcement

Sagot :

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ewomazinoade ewomazinoade · Answer 1 · 2021-05-05T20:19:44-04:00

Answer:

The Canadian dollar would appreciate

Explanation:

Real interest rate is nominal interest rate less inflation rate

exchange rate is the rate at which one currency is exchanged for another currency

if the real interest rate of the canadian dollar increases, there would be an increase in demand for canadian dollars. As a result, the demand for canadian dollars would increase. the increase in demand would lead to an appreciation of the canadian dollar

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