Pegged Currency and International Trade
Response to the following problem:
Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the United States and Mexico. The United States commonly obtains its imports from Canada and Mexico. Mexico commonly obtains its imports from the United States and Canada. The traded products are always invoiced in the exporting country's currency. Assume that the Mexican peso appreciates substantially against the U.S. dollar during the next year.
a. What is the likely effect (if any) of the peso's exchange rate movement on the volume of Canada's exports to Mexico? Explain
b. What is the likely effect (if any) of the peso's exchange rate movement on the volume of Canada's exports to the United States? Explain.