Question Details

The Canadian dollar strengthened because 



1. If monetary policy targets on an unemployment level less than the natural rate of unemployment, then over time 
a) the interest rate should rise b) the exchange rate should rise 
c) both real and nominal wages should fall 
d) the interest rate and GDP should remain roughly constant 
"The Bank of Canada began easing monetary conditions in response to the recession and the resulting substantial reduction in inflationary pressures. While the Fed was also easing, the pace of easing in Canada exceeded that in the United States, resulting in a 300 basis point narrowing in the Canada-U.S. short-term interest rate spread. Surprisingly, this did not result in a decline in the value of the Canadian dollar; in fact, it strengthened." 
2. From this information, 
a) inflation was falling at equal rates in both countries 
b) inflation in Canada must have been falling faster than in the U.S. 
c) inflation in the U.S. must have been falling faster than in Canada 
d) not enough information to determine relative declines in inflation rates 
3. The Canadian dollar strengthened because 
a) the 300 basis point narrowing was too much narrowing 
b) the Bank of Canada intervened directly in the foreign exchange market 
c) the real interest rate spread must have widened, despite the 300 basis point narrowing 
d) there is no rational explanation for the strengthening of the Canadian dollar 
4. "Annual inflation is at 35% and expected to rise to 45% by the end of the year. Interest rates are already at 40%. The Zimbabwe dollar has dropped in value by more than 55% this year ." The Zimbabwe real interest rate is 
a)	positive, and its real exchange rate has decreased 
b)	negative, and its real exchange rate has decreased 
c)	positive, and its real exchange rate has increased 
d)	negative, and its real exchange rate has increased 

5. "Argentina's _____ is measured by the spread between yields on Argentine dollar-denominated bonds and U.S. Treasuries." The blank is best filled with 
a) risk premium b) real interest rate c) expected inflation d) nominal interest rate



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