Consider the exchange rate between Ethiopia and Canada. Typically, exchange rates vary over time, sometimes quite dramatically. The scenarios present various changes that may affect the exchange rate. Indicate whether each scenario will tend to cause an appreciation or depreciation of, or have no effect on, the value of Ethiopian birr relative to Canadian dollars.
1) The magazine The Economist publishes an article indicating that analysts expect the value of Canadian dollars to rise relative to Ethiopian birr. _____
2) The central bank in Ethiopia announces that it will raise interest rates on government bonds. _____
3) Based on a World Bank report, the inflation rate in Ethiopia will be 1% next year, whereas the inflation rate in Canada will be 8.5%. _____
4) The price of a specific basket of goods in Ethiopia is roughly 1.5 times higher than the price of an identical basket of goods in Canada, even after adjusting for the exchange rate. _____
Answer bank -
a) Appreciate
b) Depreciate
c) No effect