need economics help question

label Economics
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schedule 1 Day
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1.     A Canadian wheat farmer wants to buy a tractor in the United States. The tractor costs $100,000. In the fall of 2005, the CAD/USD (Canadian dollars to U.S. dollars) exchange rate was 1.2. In the spring of 2006, the exchange rate was 1.15. In which year would the farmer pay the least amount of Canadian dollars to buy the tractor?

May 12th, 2015

1) In the fall of 2005, the CAD/USD exchange rate is 1.2.

That means 1 USD equals 1.2 CAD, that is, 1 USD = 1.2 CAD. Therefore, the cost of $100,000 can be converted to CAD by following calculation:

$100,000 = 100,000 USD x (1.2 CAD / 1 USD) = 120,000 CAD


2) Similarly, in the spring of 2006, the CAD/USD exchange rate is 1.15.

That means 1 USD equals 1.15 CAD. Therefore, the cost of $100,000 can be converted to CAD by following calculation:

$100,000 = 100,000 USD x (1.15 CAD / 1 USD) = 115,000 CAD


Therefore, it is clear that the farmer would have to pay 120,000 CAD in the fall of 2005 but only 115,000 CAD in the spring of 2006 for a tractor that costs $100,000.

In conclusion, the farmer would pay the least amount of Canadian dollars to buy the tractor in the year of 2006.

May 12th, 2015

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