Answer to Question 3:
The value of the Canadian dollar in terms of other currencies
changes from day to day in the international currency market.
This means that Canada's balance of payments is always in
equilibrium.
True or False.
The answer is false. This statement would be true only if the
Canadian Government is not buying or selling foreign exchange
reserves to influence the exchange rate. Governments frequently
do this even when the exchange rate is flexible. Their
purpose is to smooth out day-to-day fluctuations in the international
value of the home currency without trying to reverse major trend
movements. When the stock of foreign exchange reserves is thereby
changing, the balance of payments is not in equilibrium in the sense
in which we have defined that term. Balance of payments disequilibria
of this sort are of little consequence, however, because these transactions
and their effects on the exchange rate are temporary and usually small.
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