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If there is a risk differential of 1% pt. between countries A and B then their 



1. If there is a risk differential of 1% pt. between countries A and B then their 
a) real i rates should differ by 1% pt. b) nominal i rates should differ by 1% pt. 
c) nominal i rates should differ by 1% pt. plus the difference in their real growth rates 
d) real i rates should differ by 1% pt. plus the difference in their real growth rates 
2. If the Canadian risk premium is 1% (Canada is riskier), the Canadian interest rate is 10% and the U.S. interest rate is 15% and the two economies are in mutual equilibrium 
a) the $C will be depreciating relative to the US$ 
b) the $C will be appreciating relative to the US$ by 4% per year 
c) the $C will be appreciating relative to the US$ by 5% per year 
d) the $C will be appreciating relative to the US$ by 6% per year 
Suppose Canada and the U.S., on a flexible exchange rate, have real growth rates of 2%, and a risk premium of 1% (Canada is riskier). Canada's real interest rate is 4%, the U.S. nominal interest rate is 8%, and the value of the Canadian dollar is falling by 6% per year. 
3. Canada's inflation rate is 
a) less than or equal to 8% b) 9% c) 10% d) more than 10% 
4. Canada's nominal interest rate is 
a) less than or equal to 8% b) 9%, 10% or 11% 
c) 12%, 13% or 14% d) more than 14% 
5. Under a fixed exchange rate if US real growth is 2% and money supply growth is 8%, then if Canada's real interest rate is 4%, Canada's nominal interest rate 
a) should be about 10% b) should be about 12% 
c) should be equal to the US nominal interest rate 
d) depends on the rate of change of the exchange rate




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