If the inflation rate in the United States rises to a point

If the inflation rate in the United States rises to a point that it is higher than the Canadian inflation rate, all else equal, predict the impact on: 1. the U.S. demand for Canadian dollars? 2. the supply of Canadian dollars? 3. the equilibrium value of Canadian dollar?

Solution

High inflation rate in USA w.r.t. the inflation rate in Canada will cause weakening of US Dollar against Canadian Dollar. Thus, Canadian Dollar will become stronger against US Dollar. This scenario: