Suppose that both Canada and the United States have had, up until the beginning

Question

Suppose that both Canada and the United States have had, up until the beginning of Period 1, inflation rates of 0%.  Now suppose that, at the beginning of Period 1, the rate of inflation in Canada rises from 0% to 10%, and is expected to remain at a level indefinitely.  The rate of inflation in the US remains unchanged, and is expected to remain unchanged indefinitely.  Real short term interest rates in both countries remain unchanged.  What impact, if any, would you expect this change in the relative rates of inflation to have upon the Canadian $ US $ spot rate in the short run?  Explain fully.

Explanation / Answer

Answer : Generally, interest rate decrease and as a result people borrow more money to spend. On the otherhand, if interest rate increase then people tends to save money as sequrity for future. Inflation increase the price level of goods and services for a period of time. In inflation per unit purchasing power of money fall. If inflation rise and interest rate remain unchanged then people borrow enough money to spend on basic needs and other demands. And remaing income keep as security for future. Therefore, we can say that inflation has negetive impact on people life in short-run.

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