Refer to the following table, in which Q d is the quantity of loonies demanded,

Question

Refer to the following table, in which Qd is the quantity of loonies demanded, P is the dollar price of loonies, Qs is the quantity of loonies supplied in year 1, and Qs' is the quantity of loonies supplied in year 2. All quantities are in billions and the dollar-loonie exchange rate is fully flexible.

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Instructions: Enter your answer as a whole number.

A. In year 2, what quantity of loonies would the government of Canada have to buy or sell to balance its capital and financial account with its current account? _________ (Sell or Buy) __________ billion loonies.

B. In what specific account would this purchase or sale show up in Canada’s balance-of-payments statement: Foreign purchases of assets in Canada or Canada's purchase of assets abroad? ___________ (Foreign purchases of assets in Canada or Canada's purchase of assets abroad)

c. Would this transaction increase Canada’s stock of official reserves or decrease its stock? __________ (Increase or Decrease)

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Explanation / Answer

Qd P QS Total Qs Total 10 125 30 1250 20 1250 15 120 25 1800 15 1800 20 115 20 2300 10 1150 25 110 15 1650 5 550 The govt should buy and sell 15 billion loonies as the qty demanded and qty sold are the same The more profit in year 2 if 15 billion loonies are being purchased

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