6. Trade and labor mobility

Suppose that the U.S. dollar-Canadian dollar exchange rate is flexible, determined by the forces of supply and demand. Assume also that labor is mobile between the United States and Canada due to low transportation costs.

Which of the following situations is likely to occur if there is a simultaneous increase in the demand for U.S. goods and a decrease in the demand for Canadian goods?

A. The Canadian unemployment rate will increase, and the country will undergo hard economic times for a sustained period.

B. The U.S. unemployment rate will initially rise but soon fall as unemployed Americans move to Canada for employment.

C. The Canadian unemployment rate will initially rise but soon fall as unemployed Canadians move to the United States for employment.

D. The U.S. unemployment rate will increase, and the country will undergo hard economic times for a sustained period.