If Canada's Parliament decreases government spending by $25 billion, then we would expect the Canadian dollar

Question

If Canada's Parliament decreases government spending by $25 billion, then we would expect the Canadian dollar to ____ against the U.S. dollar. Remember that Canada has a flexible exchange rate.

A. Depreciate

B. Stay the same

C. Appreciate

Answer 1

C. Appreciate

Because lower Govt expenditure will result in a fall in aggregate demand including demand for imported goods. This will ease pressure on prices and prices may fall. A lower inflation rate would imply higher purchasing power and hence lead to an appreciation of the Canadian dollar.

Answer 2

A. Depreciate