In response to high inflation in the United States, let us assume that the Federal Reserve...
In response to high inflation in the United States, let us assume that the Federal Reserve decides to tighten monetary policy to combat inflation, what will happen to the value of the Canadian dollar?
Homework Answers
We believe that Canadian economy and US economy are both trading partners so that what is happening in one economy is going to affect the other. Now there is a monetary policy tightening in the United States. This will decrease the the money supply and increase the rate of interest in the United States.
As the rate of interest is increased, net capital outflow will reduce in the United States, appreciating the US dollar and depreciating the Canadian dollar. Therefore, as a result of monetary tightening in the United States, Canadian dollar is likely to depreciate.
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