Homework Answers
Decrease in output supply in Canada leads to an adverse supply shock in long run and hence prices rise eventually in Canadian markets. Thus domestic goods become more expensive and hence imports become attractive due to relatively lower cost. Due to higher imports the Canadian Dollar depreciates drastically . Also this can lead to emergence of black market which can cause ambiguity in forex rates.
Now in long run the taxation policies change drastically as well as the aggregate consumption behaviour changes which causes less demand of goods and hence lesser imports and more of saving. This now leads to stability of Canadian dollar as it starts appreciation all of sudden.
Hence the wide fluctuations and volatility makes exchange rate ambigous.
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Nominal Eachange Rates (Long-Run): Explain why a decrease in output supply in Canada relative to the...
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Question 4 (10 Marks): Assume that Canada is a small open economy which uses a system of flexible exchange rates. Th...
Question 4 (10 Marks): Assume that Canada is a small open economy which uses a system of flexible exchange rates. The economy is in equilibrium when there is a sudden decrease in real money demand. Explain what will happen to the exchange rate, output, and the real interest rate in the short-run and in the long-run.
In the long run, an increase in the money supply will lead to A a decrease...
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7. According to the theory of liquidity preference, decreasing the money supply will nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will nominal interest rates in the long run. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 8. If neither investment nor consumption depends on the interest rate, then the IS curve is , and_ policy has no effect on output. A) vertical; monetary B) horizontal; monetary...
In the long run, a decrease in the money supply is expected to lead to a decrease in nominal GDP. O is expected to lead to a decrease in velocity. O is expected to lead to an increase in nominal GDP. O is expected to lead to an increase in velocity. O has no predictable effect on nominal GDP.
Question 3 This question considers long-run policies in Mexico relative to Canada. Assume Mexico's money growth rate is currently 4% and its inflation rate is 2%. Canada's money growth rate is 6% with 3.25% inflation rate. The world real interest rate is 0.75%. For the following questions, use the conditions associated with the general monetary model. Treat Mexico as the home country and define the exchange rate as Mexican pesos per Canadian dollar, E/cS. a. Calculate the growth rate of...
I. The economy of Zarland is operating below the full-employment level of output with a balanced budget. (a) Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand, and show each of the following. (Gi) The country's current equilibrium output and price level, labeled Yj and PL1. respectively (ii) The full-employment output, labeled Yf (b) Ir Zarland increases government expenditures and taxes by equal amounts, can aggregate demand increase? Explain. (c) If Zarland decides to...
Question 3 (10 Marks): Assume that Canada is a small open economy which uses a system of fixed exchange rates. The economy is in equilibrium when there is a sudden decrease in real money demand. Explain what will happen to the exchange rate, output, and the real interest rate in the short-run and in the long-run. Question 4 (10 Marks): Assume that Canada is a small open economy which uses a system of flexible exchange rates. The economy is in...
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In the long run, with variable real exchange rates, if American goods become more attractive relative to European goods, the dollar will experience a real and a nominal appreciation; appreciation appreciation; depreciation depreciation; appreciation depreciation; depreciation
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