Question Details

When the Canadian economy has settled to a new equilibrium after this change 



1. If the Canadian interest rate is 10%, the U.S. rate is 15%, the risk differential is 2% and the two economies are in mutual equilibrium 
a) the $C is appreciating b) the $C is depreciating 
c) Canadian exports are falling and imports rising d) both a) and c) 
2. Suppose Canada and the U.S. are in equilibrium with a flexible exchange rate and a risk premium of 1% (Canada is riskier). The real rates of growth in Canada and in the U.S. are both 3%, but the U.S. interest rate is 10% and the Canadian interest rate is 7%. Relative to the Canadian dollar, the value of the U.S. dollar is 
a) rising b) falling by 2% per year c) falling by 3% per year d) falling by 4% per year 
3. Suppose the Canadian economy, on a fixed exchange rate, has a real growth rate of 2% and is in equilibrium with an inflation rate of 10% and a risk premium of 1%. Suppose changes in the U.S. cause its real rate of interest to increase from 3% to 4% and its inflation rate to increase by two percentage points. When the Canadian economy has settled to a new equilibrium after this change, what is its nominal interest rate ? 
a) less than 15% b) 15% c) 16% d) more than 16% 
4. If inflation in the U.S. is 8%, and the real interest rate in Canada is 3%, then under a fixed exchange rate 
a) both real interest rates should be the same 
b) both nominal interest rates should be the same except for a risk differential 
c) the Canadian nominal interest rate should be higher than the U.S. nominal interest rate by more than the risk differential 
d) the U.S. nominal interest rate should be higher than the Canadian nominal interest rate by more than the risk differential 
5. Canada, on a fixed exchange rate, has real growth of 2% and is in equilibrium with money growth of 10%. Changes cause the U.S. real i rate to rise by 1% pt., U.S. inflation to rise by 2% pts., and its risk differential with Canada (Canada is riskier) to drop by 137 



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