Question Details

What must be happening to cause New Zealand rates to fall below those of Australia and the U.S 



1. "Canadians must convince investors and speculators that the Canadian dollar will hold its value. For the moment, that means Canada must decisively match U.S. interest rates. Paradoxically, in the past Canada has usually ended up with the worst of both worlds: higher interest rates and a devalued dollar." This worst of both worlds most likely came about because 
a) tight monetary policy caused a balance of payments deficit to develop 
b) the risk premium increased at the same time as a current account deficit occurred 
c) higher inflation raised the nominal interest rate and caused the dollar to depreciate 
d) the Fed sold dollars on the foreign exchange market at the same time that it was selling bonds on the open market 
2. "Prior to 1989 it was widely believed that New Zealand 10-year government bond interest rates could not fall below those of Australia. Once New Zealand rates fell below those of Australia the view on relative rates changed to one where New Zealand rates could not fall below those of the United States, due to the high liquidity of the U.S. bond market. But this also has been proved wrong." What must be happening to cause New Zealand rates to fall below those of Australia and the U.S ? 
a) inflation in New Zealand must be lower than in Australia and the U.S. 
b) unemployment in New Zealand must be lower than in Australia and the U.S. 
c) New Zealand's exchange rate must be falling relative to the Australian and U.S. dollars 
d) New Zealand must have an easy monetary policy while Australia and the U.S. have a tight monetary policy 
3. "By narrowing the spread between short-term interest rates in Canada and the United States in line with the Canadian dollar forward rate, the Bank of Canada stopped the arbitrage activity that was pushing up the Canadian dollar." The difference between the Canadian and U.S. interest rates must have been 
a) zero in real terms b) bigger than the risk premium 
c) bigger than the expected fall in the Canadian dollar 
d) bigger than the risk premium plus the expected fall in the Canadian dollar 
4. "While the chartered banks have so far refrained from raising their rates, the finance minister warned reporters that this situation cannot last. The Canadian and U.S. economies are so interrelated, he said, that it will be impossible for Canadian interest rates to remain much lower than U.S. rates for an extended period of time." This politician's statement is 
a) false because if the exchange rate is fixed Canada can have a lower nominal interest rate if its inflation rate is lower 
b) false because if the exchange rate is flexible Canada can have a lower nominal interest rate if its inflation rate is lower 
c) true because so long as Canada is riskier than the U.S. its interest rate must in the long run be higher than that of the U.S. 
d) true because international arbitrage forces will ensure that Canadian and U.S. real interest rates are roughly the same except for a risk premium 
5. "Last week's movement was largely triggered by Bank of Canada concerns about the drop in the Canadian dollar in the face of higher U.S. interest rates." The movement referred to here is a higher Canadian 134 
a) interest rate b) inflation rate c) money supply d) unemployment rate



Economics Assignment Help, Economics Homework help, Economics Study Help, Economics Course Help