For each of the following state a) if the demand or supplycurve will shift left or right, (b) the effect on the exchange rate, and (c) ifit is a long, medium, or short run effect based on the supply...

For each of the following state
a) if the demand or supply curve will shift left or right, (b) the effect on the
exchange rate, and (c) if it is a long, medium, or short run effect based on the
supply of and demand for the Canadian dollar by the U.S. market and explain your
reasoning.
a. more rapid growth in Canada than in the U.S
Answer:
Because of relatively higher growth, Canadian economy is likely to have more
investment opportunities than U.S and therefore foreign funds are likely to flow in
Canadian economy, causing supply of dollar to increase in the economy and
therefore causing supply of curve of U. S dollar in the Canadian economy to shift
rightward. This would cause Canadian dollar/U.S dollar exchange rate to fall i.e.
appreciation of Canadian dollar (or depreciation of US dollar).[Refer figure]
Figure1:
b. a rise in U.S. interest rates
Answer:
A rise in the U.S interest rates means rise in the return on investment in U.S. So
there will huge inflow of foreign capital (including Canadian dollar) in the United
States. As a result, the supply of foreign currency (particularly Canadian dollar)
would increase in the United States, shifting supply curve of foreign exchange
rightward in the United States. At the same time, there would fall in the...