Suppose that Canada pegs its currency to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to:
A) cause Canada to adopt a contractionary monetary policy and the United States to adopt an expansionary monetary policy.
B) cause Canada to adopt an expansionary monetary policy and the United States to adopt a contractionary monetary policy.
C) cause both Canada and the United States to adopt contractionary monetary policies.
D) cause both Canada and the United States to adopt expansionary monetary policies.
Answer: A) cause Canada to adopt a contractionary monetary policy and the United States to adopt an expansionary monetary policy.
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