Question

At Time 1, the exchange rate was 1.1 CAD/USD (1.1 CAD = 1 USD). From Time 1 to Time 2, USD depreciated 20% against CAD. Explain the implications of this depreciation for individuals or businesses dealing with CAD and USD.

Answer 1

A 20% depreciation of the USD against the CAD means that US-based individuals and businesses will find Canadian goods more expensive, while Canadian consumers will find US goods cheaper.

Step-by-step explanation:

When the USD depreciates against the CAD, as described from Time 1 (1.1 CAD/USD) to Time 2 (20% depreciation), there are significant implications for individuals and businesses dealing with these currencies. If the USD depreciates by 20%, it implies that it would now take more USD to equal 1 CAD, making the CAD relatively stronger. This change results in Canadian goods becoming more expensive for US buyers, which can lead to a decrease in exports from Canada to the US. Conversely, American goods become cheaper for Canadian consumers, potentially increasing US exports to Canada. Additionally, US tourists will find their money has less purchasing power in Canada, while Canadian tourists will get more value for their money in the United States.