4 Income Effects on Exchange Rates Assume that the US income

4.) Income Effects on Exchange Rates Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale and (c) equilibrium value of the Canadian dollar?

Solution

If US income level rises at much higher rate then Canadian income level

Answer (a) There is no change in the US demand for Canadian dollars because the rise in income level happens of US not of canadian

Answer (b) Supply of Canadian dollar for sale would decrease because the demand for the US dollar now increase

Answer (c) The equilibrium value of the Canadian dollar should decrease because the value of the US dollar increase as rise in US income level that leads to decrease in the equilibrium value of canadian dollar as compared to US dollar