Maintaining a Pegged Exchange Rate When Currency is Undervalued
A currency is undervalued when the fixed exchange rate is below the market exchange rate.Foreigners sees canadian dollar as very attractive buy so it creates a shortage of currency(the quantity demnded of canadian dollar exceeds the quantity supplied). to fix this BOC have increases the money supply or revalue the currency.The BOC, will
increase money supply>increase in real GDP> more income> more import spending> more demand for foreign currency> decrease interest rates>less demand for CAD
It will cause inflation in canada.
Dr. Stephanie Powers, "Exchange rate", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)
A currency is undervalued when the fixed exchange rate is below the market exchange rate.Foreigners sees canadian dollar as very attractive buy so it creates a shortage of currency(the quantity demnded of canadian dollar exceeds the quantity supplied). to fix this BOC have increases the money supply or revalue the currency.The BOC, will
increase money supply>increase in real GDP> more income> more import spending> more demand for foreign currency> decrease interest rates>less demand for CAD
It will cause inflation in canada.
Dr. Stephanie Powers, "Exchange rate", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)