You are told that Canada conducts much international trade with the United Kingdom. However, the financial and investment flows between the two countries are minimal. Some information has been collected about the state of the economy and the future expectations of Canada and the United Kingdom. First, interest rates in Canada have increased but no change has been observed in the U.K. Second, inflation in Canada has increased but decreased in the U.K. Finally, fearing future instability, the Bank of Canada intervened in the foreign exchange market by exchanging a trivial amount of British pounds to purchase a very small amount of Canadian dollars.

Discuss clearly how the Canadian dollar will change based on the information provided here. Discuss the effects on demand and supply.

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