Canadian Inflation Assessment Answer

Q2. Interest Rate Effects on Exchange Rates Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds.

Q3. Income Effects on Exchange Rates Assume that the U.S income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollars? 

Q4. Interaction of Exchange Rates Assume that there are substantial capital flows among Canada decline to a level below the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Canadian dollar against the U.S. dollar? How might this decline in Canada's interest rates possibly affect the value of the Canadian dollar against the Japanese yen?

Q5. Impact of Crises Why do you think most crises in countries cause the local currency to weaken abruptly? Is it because of trade or capital flows?

Answer-1

If the rate of inflation rate in United States becomes high in comparison of Canadian inflation and other things will be equal or same, the effect of different conditions are as follows:
a) Demand related to the Canadian dollar will be increased.
b) Supply of the Canadian dollars related to sales will decrease (Jeffrey M. Perloff, James A. Brander, 2018).
c) Value of Canadian dollar should be increased.

Answer-2

If the rate of interest in United States becomes low in comparison of British rate of interest and other things will be equal or same, the effect of different conditions are as follows:
a) The demand of pound will be increased.
b) Supply of pound for the sale should be decreased (Sytse Douma, Hein Schreuder, 2017).
c) Value of pound should increase.

Answer-3

If the US income level rises at a much higher rate than does the Canadian income level. Other things being equal, the effect of different conditions are as follows:
The is no impact on the United states rate of interest, also demand related to dollar will increased, supply related to dollar for sales many not be impacted, and their value of dollar’s should increased. 
a) The demand related to goods of Canada will increase.
b) Supply of the Canadian dollar related to sales will not be impacted (Julian Gough, Stephen Hill, 1979).
c) The value related to Canadian dollar will be increased. 

Answer-4

If the rate of interest in Canada falls, then there is increase in the flow of capital from Canada to the United States (Sytse Douma, Hein Schreuder, 2017). Moreover, the investors of United States focus on the higher United States rate of interest. This will be helpful for the value of Canadian dollar because Canadian dollar value will be in downward pressure. 
The various investors of the Japan invested in the economy of Canada now shifted towards the United States (Peter J. Curwen, 1974), this exercise will reduces the flow of fund from the Japan and that will gives downward pressure on the Canadian dollar against the yen.

Answer-5

There is large influence of capital flows. If the economics condition is not sound or economy in crisis condition then investor expected less investment in the country and the existing investments of the individual will generate poor returns because of bad economic condition of the country (Jeffrey M. Perloff, James A. Brander, 2018). Therefore, investors liquidate their all investment and convert all the investment into the local currency and invest the same in other currency (Anywhere in the world), in that circumstance downward pressure on the local currency (Julian Gough, Stephen Hill, 1979). 
Accordingly, international growth process suffers in those countries and local currencies of those countries stood weak in comparison to currencies of other countries like USA, Britain, and Australia etc (Jeffrey M. Perloff, James A. Brander, 2018). Further, fixed exchange rate system in some Asian countries discourages venture capital in the international money market which implies that foreign exchange mechanism fail to develop in those Asian countries some times which hampers the value of local currency i.e., the currency value fall highly in the international foreign exchange market.

References

Jeffrey M. Perloff, James A. Brander (2018) Managerial Economics and Strategy, Global Edition, 2/E: Pearson
Sytse Douma, Hein Schreuder (2017)-Economic Approaches to Organization, 6/E: Pearson
Julian Gough, Stephen Hill. (1979) Fundamentals of Managerial Economics: Springer
Peter J. Curwen. (1974) Managerial Economics: Springer