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( 1 0 Marks ) This question looks at how expectations are made in the economy, and their relative importance. The Bank of Canada is
Marks This question looks at how expectations are made in the economy, and their relative importance. The Bank of Canada is headed by a body known as "The Governing Council". It is a person group that ultimately decides on what the interest rate will be Suppose the following series of events occurred:
Monday March th When interviewed, all the leading economists in Canada are certain that the Bank of Canada will not be changing the interest rate. These beliefs are widely reported in the media. Exchange rate that day:
Wednesday March th The Bank of Canada announces that they are not changing the interest rate. Exchange rate that day:
Wednesday March th :am Exchange rate at the opening of the market:
Wednesday March th :am The Bank of Canada releases the minutes of the meeting of the Governing Council at which the March th decision was taken. These minutes reveal that it was proposed by one member that interest rates should be lowered, but that this was rejected by a vote the smallest possible margin for rejection
Wednesday March th :pm Exchange rate at the closing of the market:
Using our model of exchange rate determination, explain why the Canadian dollar suddenly depreciated in value, even though nothing substantial changed in the economy and the only thing of note that happened on that day was that the minutes of the meeting were released.
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