Pegged Currency and International Trade. Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the U.S. and Mexico. The U.S. commonly obtains its imports from Canada and Mexico. Mexico commonly obtains its imports from the U.S. and Canada. The traded products are always invoiced in the exporting country’s currency. Assume that the Mexican peso depreciates substantially against the U.S. dollar during the next year. 1) What is the likely effect (if any) of the peso’s exchange rate movement on the volume of Canada’s exports to Mexico? Explain. ANS://The Peso depreciated against Canadian dollar, so Canadian exports to Mexico should decrease 2)What is the likely effect (if any) of the peso’s exchange rate movement on the volume of Canada’s exports to the U.S.? Explain. ANS://The US should demand less from Canada ( demand more from Mexico), so Canadian export will decrease
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