Final answer:
The demand for Canadian dollars will increase if there is global economic growth and a reduction in foreign trade barriers, and it will decrease if domestic prices in Canada rise.
Step-by-step explanation:
In the foreign exchange market for Canadian dollars, if growth in the world real GDP occurs and at the same time, foreign countries reduce the trade barriers they impose on goods coming from Canada, the demand for Canadian dollars will increase. This is because Canadian exports would likely become more competitive with fewer trade barriers, leading to an increase in demand for Canadian goods. As more foreign buyers purchase Canadian goods, they need more Canadian dollars to complete these transactions, leading to an increased demand for Canadian dollars.
On the other hand, the demand for Canadian dollars will decrease if domestic prices in Canada increase. If Canadian goods become more expensive due to inflation or other domestic price increases, foreign buyers might seek cheaper alternatives, and the demand for Canadian currency could fall as a result. This decrease in demand means that the value of the Canadian dollar could depreciate on the foreign exchange market.
In summary, the demand for Canadian dollars will increase with global economic growth and the lowering of trade barriers by foreign countries and will decrease if domestic prices in Canada rise.