Question

If the price levels in the United States and in Canada are unchanged, but the nominal exchange rate (Canadian dollars per U.S. dollar) rises, then the U.S. dollar?

1) Appreciates
2) Depreciates
3) Remains unchanged
4) Cannot be determined

Answer 1

If the nominal exchange rate rises, meaning it takes more Canadian dollars to buy one U.S. dollar without a change in price levels, then the U.S. dollar appreciates. This relationship shows that when one currency strengthens, the other tends to weaken. This is evident through historical fluctuations in exchange rates.

Step-by-step explanation:

When we consider the nominal exchange rate between currencies, such as the Canadian dollar and the U.S. dollar, an increase in the nominal exchange rate (measured as Canadian dollars per U.S. dollar) indicates that it takes more Canadian dollars to purchase one U.S. dollar. In terms of currency value, this means that the U.S. dollar is gaining strength or appreciating compared to the Canadian dollar. Conversely, the Canadian dollar would be depreciating in this scenario.

For example, if the exchange rate went from 1 U.S. dollar for $1.17 Canadian to 1 U.S. dollar for $1.39 Canadian, the U.S. dollar has appreciated. Over the historical timeline, such fluctuations show that exchange rates can move up and down substantially. However, without a change in the price levels, a rise in the nominal exchange rate (Canadian dollars per U.S. dollar) unequivocally means the U.S. dollar appreciates.