Economic

Q1. Consider the DLF-SLF diagram for Canada (DLF = Demand for Loanable Fund, SLF= Supply of Loanable Fund) and assume the market for loanable fund is in equilibrium. 1. 1. Because of the new US tariff policy on Canadian steel and lumber, Canadian exports to US will likely decline leading to lower expected profits in Canada. Show on graph how the declining expected profits in Canada will affect Canadian interest rate through shifting DLF or SLF. 2. The Canadian government has decided to increase spending on infrastructure and run a deficit. Show on graph how this policy will affect the interest rate in Canada through shifting DLF or SLF. Q2. During the 2020 pandemic, government of Canada increased its spending to support employees and employers affected by the lockdown. Using the DLF-SLF diagram, show 1. show how would government's increasing deficit change the interest rate in Canada? 2. The interest rate in Canada was very low (close to zero percent) during the pandemic. Is this consistent with your answer in (1)? If not, what can explain the discrepancy? [Hint: You can take a look at the Bank of Canada's policy on money supply and interest rate]. Q3. Bank of Canada used Quantitative Easing (QE) policy as a response to pandemic (QE is massive central bank open market purchases of government and private bonds.) 1. How does QE policy changes money supply? Explain the mechanism. 2. Does QE necessarily lead to higher inflation? Note the difference between changes in price level and changes in inflation. 3. Under what conditions will QE lead to higher inflation