At a fixed rate of 0.5, what is the change in official international reserves measured in USD?
The demand for Canadian dollars(CAD) for the US dollar(USD) in the foreign exchange market is given by D=10-2e where e is measured in USD per CAD. The supply of Canadian dollars in this market is given by the S=5+3e
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The demand for Canadian dollars in exchange for US dollars is given by D = 10 - 2*e and the supply of Canadian dollars in exchange for US dollars is given by S = 5 + 3*e. Here e is the exchange rate of US dollars per Canadian dollar. e is given as 0.5.
At e = 0.5 the demand for Canadian dollars is 10 - 2*0.5 = 9 and the supply of Canadian dollars is 5 + 3*0.5 = 5 + 1.5 = 6.5
There are more buyers for Canadian dollars than there are sellers for the same. As a result the exchange rate has to change till the demand is equal to the supply. If the exchange rate is maintained at this level which can be done by the Central bank of Canada satisfying the excessive demand for Canadian dollars it would result in an outflow of Canadian dollars and an inflow of US dollars.
The reserves of US dollars with the Central bank in Canada would increase.
At an exchange rate of 0.5 there would be an increase in the foreign currency reserves in the form of US dollars in Canada.
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