for them in foreign currency and therefore need to convert Canadian dollars. The supply is made up of those wishing to buy Canadian dollars; these people include those buying Canadian export and those investing in Canadian assets. The intersection of theses two opposing actions, buying and selling Canadian dollars determines the volume traded and at what price or the exchange rate. Due to geographic proximity, free trade and economic integration, the foreign currency most demanded and most sold by Canadians is the US dollar. The value of our currency is most reflected in the price of the US dollar. This paper will therefore use the price of a US dollar in terms of Canadian dollars as the value of the Canadian dollar.In the previous section I assumed that the currency is flexible, that is to say that the price is based on foreign exchange market activity. It is however possible to fix the price of a currency at a particular level. In order to accomplish this, the central bank must be willing to buy or sell the perceived excesses of the market; i.e. the bank must buy or sell enough Canadian dollars so that the price remains stable. If such a practice becomes unsustainable the central must change the fixed price or move the peg. Such a system, known as the Breton Woods system was predominant in post-world war II industrialized economies. However by the Nineteen sixties Canada, Canada like many other nations, moved to a flexible exchange rate system. It is important not to assume that because the currency is not officially fixed at some level, that the central bank does not play a role in determining its price. The central bank still intervenes in the market but not to hold the price at a certain level, but rather to prevent to price from fluctuating rapidly up or down. This type of exchange rate regime is known as a dirty float.Over this past decade, the value of a Canadian dollar has dropped nearly 25%. In 1990, a US dollar ...
