Question

question 6 (1 point)
at the beginning of the year, canada has foreign assets valued at €500 billion and foreign liabilities valued at $450 billion, where both values are in the respective currencies. assume that the exchange rate at the beginning of the year is 1.5 cad per euro (cad/eur). during the year, the canadian dollar appreciates to 1.3 cad per euro. calculate the impact of this exchange rate change on canada’s net foreign wealth position, in cad, assuming no other transactions occurred.
the net foreign wealth position decreases by cad 150 billion
the net foreign wealth position remains unchanged
the net foreign wealth decreases by cad 100 billion
the net foreign wealth position increases by cad 100 billion

Explanation:

Step1: Calculate initial CAD value of assets and liabilities

• Assets: €500 billion, exchange rate 1.5 CAD/€. So asset value in CAD: \( 500 \times 1.5 = 750 \) billion CAD.
• Liabilities: €450 billion, exchange rate 1.5 CAD/€. So liability value in CAD: \( 450 \times 1.5 = 675 \) billion CAD.
• Initial net wealth: \( 750 - 675 = 75 \) billion CAD.

Step2: Calculate new CAD value of assets and liabilities after exchange rate change

• New exchange rate: 1.3 CAD/€.
• Asset value in CAD: \( 500 \times 1.3 = 650 \) billion CAD.
• Liability value in CAD: \( 450 \times 1.3 = 585 \) billion CAD.
• New net wealth: \( 650 - 585 = 65 \) billion CAD.

Step3: Find the change in net wealth

• Change: \( 65 - 75 = -100 \) billion CAD (negative means decrease by 100 billion CAD).

Answer:

The net foreign wealth position decreases by CAD 100 billion (the second option: "The net foreign wealth position decreases by CAD 100 billion")