Question Details

Under flexible exchange rates a small open economy should 



Suppose the Canadian and U.S. economies, on a flexible exchange rate, have real growth rates of 2% and a risk premium of 1% (Canada is riskier). The Canadian money growth rate is 10%, the U.S. money growth rate is 7% and the U.S. real interest rate is 3%. 
1. The Canadian nominal interest rate is 
a) 10% or less b) 11% c) 12% d) more than 12% 
2. The value of the Canadian dollar is falling each year by 
a) less than 2% b) 2% c) 3% d) more than 3% 
3. We can be confident that our dollar will appreciate if 
a) we have a balance of trade surplus b) we have net capital inflows 138 
c) our inflation rate is below that of other countries 
d) our nominal interest rate is higher than in other countries 
4. Interest rate parity claims that 
a) real interest rates are identical across countries 
b) nominal interest rates are identical across countries 
c) real interest rates are identical across countries except for a risk differential 
d) nominal interest rates are identical across countries except for a risk differential 
5. Under flexible exchange rates a small open economy should 
a) lose control of its monetary policy b) be insulated from its trading partners' inflation 
c) tend to experience the inflation of its trading partners 
d) find that changes in its interest rates match changes in its trading partner's interest rates




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