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Chapter 11

3. Suppose that the international demand and supply of Canadian dollars (in billions) is as

shown in Table 3. This represents that total market for Canadian dollars.

a) Complete the following table:

Table 3

Value of

Cdn $ in

US $

$0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

1.02

1.04

Demand for Canadian Dollars

Exports

Factor

Foreign

of Goods income Investment

&

Earned

in Canada

Services Abroad

$110

109

108

107

106

105

104

103

102

101

100

$80

80

80

80

80

80

80

80

80

80

80

$180

175

170

165

160

155

150

145

140

135

130

Total

Supply of Canadian Dollars

Imports Foreign

Canadian

of Goods

factor

Investment

&

income

Abroad

Services

Paid

Abroad

$80

$66

$136

83

66

138

86

66

140

89

66

142

92

66

144

95

66

146

98

66

148

101

66

150

104

66

152

107

66

154

110

66

156

b) What is the equilibrium value of the Canadian dollar?

c) What is the value of its balance of trade?

d) What is its current account balance?

e) What is its capital account balance?

f) What is its overall balance of payments (current and capital accounts)?

Now, suppose that Canada fixes its exchange rate against the U.S. dollar at a value of

$1 Canadian equals $0.94 American.

g) What is the value of its balance of trade?

h) What is its current account balance?

i) What is its capital account balance?

j) What is the overall balance of payments (current and capital accounts)?

k) What is the balance on its official settlements account?