Question

Figure 13-2 Real Interest Rate Supply of Loarable Funds World interest rate, o Derrand for Loanable Funds Quantity of Loanable Funds Real Exchange Rate Supply of Canadian Dollars (5-1) Quantity of Dollars Refer to the Figure 13-2. If the interest rate was initially at ro and an import quota was imposed, what would happen to the real interest rate? It would decrease because demand would shift left. It would decrease because supply would shift right. It would not change because both supply and demand would shift right. It would not change because the world interest rate is not affected.

Answer 1

Question 55)

d) It would not change because the world interest rate is not affected.

When import quota is sancioned , there is increase in exports of home country and this appreciates the exchange rate in home currency terms. This appreciation no way affects the interest rate and hence it stays the same.

Question 56) b) Canadian exports increase and dollar appreciates

With import quota there will be more Canadian exports and this will increase demand for Canadian dollar which will appreciate its value.

Question 57) a) Trade Policy do not affect trade balance but affect industries in differently than others

Trade policy like quotas will increase exports which will appreciate exchange rates and which in sum brings the net effect back and there is no change in trade balance. Different industries may be affected differently as trade policy has disproportionate affect on the industries, it may affect the industry on which quota is applied more than any other industry.