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Our trade account has remained in a deep deficit even though the dollar has fallen sharply 



"If inflation exists in the rest of the world, but not in Canada, Canada's merchandise trade surplus should soar with exports becoming cheap and imports expensive. Of course, that would stimulate economic activity in Canada and, pretty soon, the inflation rate would begin to rise. How would the authorities counter that undesirable development? By keeping money growth low and interest rates much higher than U.S. interest rates - the same way that the Bank of Canada has fought inflation in the past and still does today." 
1. Under a fixed exchange rate this thinking is wrong because 
a) fighting inflation is futile in this context 
b) the merchandise trade surplus should not develop 
c) low money growth and high interest rates cannot attack inflation 
d) it is the balance of payments that is important, not the balance of trade 
2. Under a flexible exchange rate this thinking is wrong because 
a) the merchandise trade surplus should not develop 
b) the exchange rate will be prevented from continually falling 
c) low money growth and high interest rates cannot attack inflation 
d) low money growth is not feasible in the face of large balance of payments surpluses 
3. "An even better case study is Singapore. The Singapore Monetary Authority deliberately targets a trend appreciation in the Singapore dollar versus the U.S. dollar in order to maintain price stability." This implies that 
a) Singapore should experience zero inflation 
b) Singapore should experience an inflation rate equal to that of the U.S. 
c) Singapore should experience an inflation rate higher than that of the U.S., by an amount equal to its trend appreciation rate 
d) Singapore should experience an inflation rate lower than that of the U.S., by an amount equal to its trend appreciation rate 
4. "From their perspective, the only other way to lower interest rates is for the Fed to increase the supply of funds by continuously pumping more money into the economy. But they argue against such a ____ monetary policy, claiming it would not be tolerated for long by the financial markets since it would lead to a further _____ in the value of the dollar and more _____." The blanks are best filled with 
a) tight; fall; inflation b) loose; fall; inflation 
c) tight; rise; unemployment d) loose; rise; unemployment 127 
5. "Our trade account has remained in a deep deficit even though the dollar has fallen sharply over the past four years, a development that normally would have led to an improvement in trade figures." Trade figures have not improved because the 
a) nominal exchange rate must have increased 
b) fall in the dollar was offset by a rise in our prices 
c) fall in the dollar was offset by a rise in our interest rates 
d) fall in the dollar was only a fall in the real exchange rate



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