Consider a Canadian firm that exports hockey sticks to the U.S. Prices are set and collected in U.S. dollars. The inflation differential between Canada and the U.S. is 2 percent (Canadian inflation minus U.S. inflation). What is the valuation impact on the Canadian exporter if the value of the Canadian dollar falls by 2 percent during the next year? A)The firm is hurt by the falling value of the Canadian dollar. B)The firm is helped by the falling value of the Canadian dollar. C)As the Canadian dollar falls, the firm will cut its U.S. dollar prices. D)All currency changes are nominal, so the change has no real impact.
D if the currency changes are reflecting just the inflation differential there will be no real impact…
D? If the inflation differential was 2% then thecurrency should have ideally changed by 2% to maintain the parity. It did! So in real terms no impact on export transactions
umm I thought it was B… but D does seem to make sense.
D is correct! Just what mumu and dinesh explain.