Pegged Exchange Rates
Response to the following problem:
The United States, Argentina, and Canada commonly engage in international trade with each other. All the products traded can easily be produced in all three countries. The traded products are always invoiced in the exporting country's currency. Assume that Argentina decides to peg its currency (called the peso) to the U.S. dollar and the exchange rate will remain fixed.
Assume that the Canadian dollar appreciates substantially against the U.S. dollar during the next year.
a. What is the likely effect (if any) of the Canadian dollar's exchange rate movement over the year on the volume of Argentina's exports to Canada? Briefly explain.
b. What is the likely effect (if any) of the Canadian dollar's exchange rate movement on the volume of Argentina's exports to the United States? Briefly explain.