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The governor of the Bank of Canada urged Canadians today to continue the fight 



1. "The governor of the Bank of Canada urged Canadians today to continue the fight against inflation, but warned they cannot expect any significant drop in interest rates until the U.S. takes convincing action to reduce its budget deficit." Despite this statement, the Canadian interest rate could fall significantly if 
a) the risk premium were to rise b) the Canadian budget deficit fell significantly 
c) Canadian money growth were increased and its exchange rate fixed 
d) Canadian inflation were lowered and its exchange rate allowed to increase 
2. "West Germany's decision to spend 85 billion dollars on reunification probably pushed up interest rates in the United States by half a percentage point." U.S. interest rates rose because 
a) the world real interest rate rose b) expected inflation in Germany rose 
c) the nominal interest rate in Germany rose 
d) the risk premium between the U.S. and Germany rose 
3. "A recent study claims that Japanese households are likely to decrease their saving rate in the 1990s, but doesn't say what implication this will have for interest rates in the United States." U.S. interest rates will probably 
a) rise because the world interest rate will rise 
b) fall because the risk premium with Japan should fall 
c) fall because Japan will not be able to buy as many U.S. exports 
d) fall because inflation in the U.S. should rise as higher Japanese consumption demand bids up U.S. prices 
4. "People widely believe that there is a correlation between higher interest rates and capital inflows, but this belief is as false as the once accepted belief that there is a correlation between unemployment and inflation, causing the one to go up when the other goes down. These correlations don't stand up to scientific research." The correlation between interest rates and capital flows does not stand up because capital inflows are only affected by a higher interest rate if 
a)	there is a current account deficit 
b)	there is a balance of payments deficit 
c)	it is a higher real interest rate 
d)	it is a higher real interest rate relative to foreign real interest rates 

5. "U.S. money supply in the October-to-March period grew at a 10 percent annual rate, compared with growth of less than 1 percent between June and October last year. This behavior tends to weaken the U.S. dollar." This weakens the U.S. dollar because 
a) the Fed is not buying as many dollars on the foreign exchange market 
b) this restrictive monetary policy is creating a balance of payments deficit 
c) foreigners anticipate higher U.S. inflation, expect U.S. bond prices to fall and so capital inflows fall 
d) foreigners anticipate lower U.S. inflation, expect U.S. bond prices to rise and so demand for dollars decreases because they buy bonds instead



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