If the income level in the United States increases at a grea

If the income level in the United States increases at a greater rate than that of Canada, all else equal, predict the impact on:

the U.S. demand for Canadian dollars?

the supply of Canadian dollars for sale?

the equilibrium value of the Canadian dollar?

Solution

Higher income growth rate in US will increase the aggregate demand in US at a faster rate. In the short run, aggregate supply cannot increase at the same rate, so there is s shortage in domestic market which has to be fulfilled by imports. As import demand increases, US demand for Canadian dollar rises and demand for US dollar falls.

But supply of Canadian dollars remain unchanged (or increases very slowly), so equilibrium value of Canadian dollar increases (appreciates) and US dollar depreciates.