1. When Canada raises its interest rates, the response is higher foreign investments. The following are the advantage and disadvantage of such government interaction on fellow Canadians:
Advantage: An increase in interest rates help Canadian businesses that rely on import goods. For example, a company that gets raw materials imported in order to manufacture the product will pay less for foreign products because higher interest rates in Canada makes the Canadian dollar stronger as compared to foreign currency.
Disadvantage: It is sad news for Canadians who are borrowing when the government decides to raise interest rates. Higher interest rates means that borrowers have to pay more borrowing fees just to borrow the same amount of money. (Good …show more content…
More imports and less exports lead to trade deficit. Thus, US currently runs a current account deficit. Having more imports than exports mean that US money is going out to foreign countries more than it is coming into the country, resulting in a negative balance of trade.
Since US is experiencing a current account deficit, it means that US will see its currency depreciate. In other words, the dollar value will fall. A trade deficit means that there is more and more outflow of dollars. US imports more so it needs more of the foreign currency. This means that the demand for foreign currency is greater than the demand for dollars, causing the dollar value to fall.
4. An increase in productivity in Mexico will increase foreign demand for peso. A country that is highly productive will eventually create a trade surplus. Therefore, the effect on currency is the very opposite for that of a country with a trade deficit (as discuss in previously question). Therefore, increase in productivity means that the value of peso will increase as compared to foreign currency. Increase in productivity means that Mexico is producing more, thus, exporting more. As it exports more, there is a greater demand for peso from foreign countries. Therfore, there is more demand for peso than there is for foreign currency, leading to an increase in the value of
Advantage: An increase in interest rates help Canadian businesses that rely on import goods. For example, a company that gets raw materials imported in order to manufacture the product will pay less for foreign products because higher interest rates in Canada makes the Canadian dollar stronger as compared to foreign currency.
Disadvantage: It is sad news for Canadians who are borrowing when the government decides to raise interest rates. Higher interest rates means that borrowers have to pay more borrowing fees just to borrow the same amount of money. (Good …show more content…
More imports and less exports lead to trade deficit. Thus, US currently runs a current account deficit. Having more imports than exports mean that US money is going out to foreign countries more than it is coming into the country, resulting in a negative balance of trade.
Since US is experiencing a current account deficit, it means that US will see its currency depreciate. In other words, the dollar value will fall. A trade deficit means that there is more and more outflow of dollars. US imports more so it needs more of the foreign currency. This means that the demand for foreign currency is greater than the demand for dollars, causing the dollar value to fall.
4. An increase in productivity in Mexico will increase foreign demand for peso. A country that is highly productive will eventually create a trade surplus. Therefore, the effect on currency is the very opposite for that of a country with a trade deficit (as discuss in previously question). Therefore, increase in productivity means that the value of peso will increase as compared to foreign currency. Increase in productivity means that Mexico is producing more, thus, exporting more. As it exports more, there is a greater demand for peso from foreign countries. Therfore, there is more demand for peso than there is for foreign currency, leading to an increase in the value of