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18) The lower the exchange rate, theA) larger is the quantity of Canadian dollars supplied in the foreign exchange market.B) larger is the quantity of Canadian dollars demanded in the foreign exchange market.C) smaller is the quantity of Canadian dollars supplied in the foreign exchange market.D) smaller is the quantity of Canadian dollars demanded in the foreign exchange marketE) B and CAnswer: E

Question

Can you explain why the answer is E?

18) The lower the exchange rate, the
A) larger is the quantity of Canadian dollars supplied in the foreign exchange market.
B) larger is the quantity of Canadian dollars demanded in the foreign exchange market.
C) smaller is the quantity of Canadian dollars supplied in the foreign exchange market.
D) smaller is the quantity of Canadian dollars demanded in the foreign exchange market
E) B and C
Answer: E
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18) The lower the exchange rate, the A) larger is the quantity of Canadian dollars supplied in the foreign exchange market. B) larger is the quantity of Canadian dollars demanded in the foreign exchange market. C) smaller is the quantity of Canadian dollars supplied in the foreign exchange market. D) smaller is the quantity of Canadian dollars demanded in the foreign exchange market E) B and C Answer: E

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Step 1

Exchange rate between two currencies gives the price of one currency in terms of the other. For instance, consider two currencies Canadian Dollars (CD) and currency A. The exchange rate between these two currencies is written as x CD = 1 A.

Step 2

Demand for a currency, say, Canadian Dollars gives the quantity of Canadian Dollars demanded at different prices of currencies (exchange rates). Demand for Canadian Dollar curve slopes downwards since a higher quantity of a Canadian Dollars is demanded at lower exchange rate. It means that to get 1 unit of currency A, one has to give lesser number of Canadian dollars. It means that Canadian Dollars are more valuable.

Supply of a currency, say, Canadian Dollars gives the quantity of Canadian Dollars supplied at different prices of currencies (exchange rates). Supply of Canadian Dollar curve slopes upwards since a lower quantity of a Canadian Dollars is supplied at lower exchange rate. It means that at a lower exchange rate, there is less willingness to supply Canadian Dollar since the price of Canadian Dollars is low in terms of other currency.

Step 3

The demand for and supply of Canadian...

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