Canadian Securities Course (CSC) Level 1 Practice Exam

What is the primary impact of increased foreign investments on Canadian interest rates?

1. Decrease in Canadian interest rates

2. No effect on Canadian interest rates

3. Strengthening of the Canadian dollar and rise in interest rates

4. Weakening of the Canadian dollar and lowering of interest rates

The correct answer is: Strengthening of the Canadian dollar and rise in interest rates

The primary impact of increased foreign investments on Canadian interest rates can be understood through the relationship between foreign capital inflow, currency value, and interest rates. When foreign investments into Canada increase, this influx of capital typically strengthens the Canadian dollar. A stronger Canadian dollar means that it can buy more of foreign currencies, making imports cheaper and reducing the overall cost of goods in Canada. As the value of the Canadian dollar appreciates, it can attract additional foreign investment and result in more funds being available within the domestic economy. Consequently, the demand for loans and credit may rise, pushing up interest rates since lenders may perceive a lower risk in lending due to increased confidence from foreign investments. Additionally, the Bank of Canada might adjust monetary policy in response to changes in currency strength and economic conditions, which can also lead to rising interest rates. In summary, increased foreign investment tends to strengthen the Canadian dollar and may lead to a rise in interest rates as the economy responds to the inflow of capital and the associated changes in demand for credit.