3. What determines Exchange Rates? i. Explain how the demand and supply causes the value of a currency to change?

ii. Americans buy most of Canadas softwood lumber. If the world price of softwood lumber increases from $350 US per million board foot, to $800 US per million board foot, will the Canadian dollar appreciate or depreciate in value relative to the US$? Explain.

1. Inflation Effects on Exchange Rates. Assume that the U.S. inflation rate is a lot lower relative to Canadian inflation rate. Other things being equal, explain how this would affect the:

(a) U.S. demand for Canadian dollars,

(b) supply of Canadian dollars for sale, and

(c) equilibrium value of the Canadian dollar?

(d) Interest rates in U.S. versus Canada?

1. Interest Rate Effects on Exchange Rates. Assume U.S. interest rates rise relative to British interest rates. Other things being equal, explain how this would affect the:

(a) U.S. demand for British pounds,

(b) supply of pounds for sale, and

(c) equilibrium value of the pound?

(d) Price of U.S. Treasury bonds?