If the US inflation rate becomes high relative to Canadian inflation the followi

Question

If the US inflation rate becomes high relative to Canadian inflation the following outcomes will occur for the scenarios listed - a) The demand for Canadian dollars will increase; b) The supply of Canadian dollars available for sale in the market will decrease; c) The value of the Canadian dollar will increase Assuming all other things remain equal. Is not the converse true? Given = m + v - y, and given that the situation shows no evidence of a change in the rate of velocity or of national income, an increase in inflation reflects a direct increase in nominal money supply, m. Correct?

Explanation / Answer

c) The value of the Canadian dollar will increase

Yes , the converse will also be true.

     Correct

As, MV = PY

and % change equation is

     Change in M + Change in V = Change in P + Change in Y

Since V and Y are n't changing, So effect of change in P can be directly observed in M.

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