FRQ # 2 (Unit 5)

2. Assume that South Korea and Canada are trading partners. Complete the following regarding the Canadian dollar and the South Korean currency, the won. (a) Draw a correctly labeled graph for the foreign exchange market for the Canadian dollar. (b) Explain how each of the following will affect the demand for the Canadian dollar. i. The inflation rate in Canada is higher than the inflation rate in South Korea. ii. Real interest rates in Canada fall relative to real interest rates in South Korea. (c) Given your answer in part (b) (ii), indicate how the value of the Canadian dollar is affected. (d) As a result of the currency change in part (c), what will happen to Canadian exports to South Korea? Explain.