Impact of Inflation on Trade Partners: Analysis and Graphical Representation
How will the change in the price level in the United States affect:
U.S. demand for Canadian goods and services?
Net exports of the United States? Explain.
Ceteris paribus, will Canada's national income increase, decrease, or remain the same?
On side-by-side foreign exchange market graphs, illustrate the impact of the change in relative inflation on the supply of the U.S. dollar (USD) and on the demand for the Canadian dollar (CAD).
(a) The alterations or the change in the price level in the United States when compared to Canada tend to influence the U.S. demand for Canadian goods and services and their net exports to the United States.
(b) The effect of the change identified in part (a) would cause:
AD (Aggregate Demand)
Real GDP
Price level
(c) Ceteris paribus, Canada's national income is likely to experience a change due to the inflation in the United States.
(d) The impact of the change in relative inflation on the supply of the U.S. dollar and the demand for the Canadian dollar will be reflected in the foreign exchange market graphs.
When the price level in the United States rises compared to Canada, it affects the demand for Canadian goods and services as well as the net exports of the United States. This is because the higher prices in the United States make U.S. goods and services more expensive relative to those of Canada, leading to a change in demand and exports.
In a ceteris paribus scenario, Canada's national income may increase, decrease, or remain the same depending on various factors such as the magnitude of inflation and other economic conditions affecting trade between the two countries.
The impact of inflation on the supply of the U.S. dollar and the demand for the Canadian dollar can be visually represented on foreign exchange market graphs, showing how the relative inflation influences currency exchange rates.