When the Canadian dollar depreciates in foreign exchange markets, many people vi

Question

When the Canadian dollar depreciates in foreign exchange markets, many people view this as “good” for the Canadian economy. When the Canadian dollar appreciates against the US dollar, there are people who feel good about it, believing a strong Canadian currency is indicative of a strong economy. What do you think? Who is likely to benefit from a depreciation of the Canadian dollar? Who is likely to gain from an appreciating currency? If you are living outside Canada, you may consider the currency of your country of residence as you formulate your answer. Your conclusions will not change.

Explanation / Answer

An appreciation means an increase in the value of Canadian dollars, which means it is worth more in terms of foreign currency. An appreciation will tend to reduce inflation and can make Canadian goods more competitive leading to stronger exports in the long-run. An appreciation can help improve living standards and it enables consumers to buyer cheaper imports. If appreciation is a result of competitiveness than it is sustainable and it shouldn’t cause lower growth.

Devaluation is the decision to reduce the value of Canadian dollars in a fixed exchange rate system. It means that the value of the currency falls. Canadians will find imports and foreign travel more expensive. However, domestic exports will benefit from their exports becoming cheaper. This provides a boost for domestic demand and could lead to job creation in the export sector.

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