a) If the Bank of Canada were to respond to a slowdown in the domestic economy b

Question

a) If the Bank of Canada were to respond to a slowdown in the domestic economy by easing monetary policy, all other things being equal, one would predict, in the short run, a(n) increase in the real interest rate, an increase in demand for the dollar, and a depreciation of the dollar decrease in the real interest rate, an increase in demand for the dollar, and an appreciation of the dollar increase in the real interest rate, an increase in demand for the dollar, and an appreciation of the dollar increase in the real interest rate, an decrease in demand for the dollar, and a depreciation of the dollar decrease in the real interest rate, a decrease in demand for the dollar, and a depreciation of the dollar b) The theory that nominal exchange rates are determined as necessary for the law of one price to hold is called the fixed-exchange-rate rule purchasing power parity the equilibrium principle the law of supply and demand international equality c) A rise in the real interest rate in Canada may be expected to lower demand for Canadian goods through each of these channels EXCEPT raising the borrowing cost and discouraging spending on consumer durables raising the borrowing costs and discouraging investment on fixed capital raising the borrowing costs and discouraging residential investment raising the value of the domestic currency and discouraging net exports raising the value of the domestic currency and discouraging imports d) The economies most likely to benefit from a fixed exchange are those that are ________, with a history of ______ rates of inflation. large; low medium-sized; average small; very high large; very high small; low e) An increase in the real exchange rate will tend to ____ exports and ______ imports. decrease; increase decrease; decrease increase; decrease not change; not change increase; increase f) A speculative attack is a presumptive increase in the officially fixed value of a currency a massive purchase of domestic currency assets by domestic and foreign financial investors a massive selling of domestic currency assets by domestic and foreign financial investors a presumptive decrease in the officially fixed value of a currency the imposition of tariffs and quotas to prevent the inflow of foreign goods g) Purchasing power parity is the theory that nominal exchange rates are determined by the forces of supply and demand by real exchange rates by the degree of monetary policy tightness or easing as necessary for the law of one price to hold as necessary to achieve the fundamental value of the exchange rate h) Holding all else constant, an increase in the real interest rate on Canadian assets will ____ the demand for dollars in the foreign exchange market and ____ the equilibrium Mexican peso-dollar exchange rate. increase; decrease decrease; decrease increase; increase decrease; increase not change; not change i) The real exchange rate is the quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market market in which currencies of various nations are traded for one another rate at which two currencies can be traded for each other price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency rate at which a good in one country can be traded for the same good in another country j) A fall in the real interest rate in Canada may be expected to raise demand for Canadian goods through each of these channels EXCEPT lowering of borrowing cost and stimulating spending on consumer durables lowering of the value of the domestic currency and stimulating net exports lowering of borrowing costs and stimulating residential investment lowering of borrowing costs and stimulating investment on fixed capital lowering of the value of the domestic currency and stimulating imports a) If the Bank of Canada were to respond to a slowdown in the domestic economy by easing monetary policy, all other things being equal, one would predict, in the short run, a(n) increase in the real interest rate, an increase in demand for the dollar, and a depreciation of the dollar decrease in the real interest rate, an increase in demand for the dollar, and an appreciation of the dollar increase in the real interest rate, an increase in demand for the dollar, and an appreciation of the dollar increase in the real interest rate, an decrease in demand for the dollar, and a depreciation of the dollar decrease in the real interest rate, a decrease in demand for the dollar, and a depreciation of the dollar

Explanation / Answer

a. decrease in the real interest rate, a decrease in demand for the dollar, and a depreciation of the dollar

b. purchasing power parity

c. raising the value of the domestic currency and discouraging net exports

d. small; very high

e. decrease; increase

f. a massive selling of domestic currency assets by domestic and foreign financial investors

g. as necessary for the law of one price to hold

h. increase; increase

i. price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency

j. lowering of the value of the domestic currency and stimulating imports

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