Homework Assignment #2 Due Dec 19'\" 2022 at 11:59pm (Submit via moodle) Please answer each question in full sentences and explain with detail. 1. Using the quantity theory of money, suppose that this year's money supply is $50 billion, nominal GDP is $l trillion, and real GDP is $500 billion. a. b. What is the price level? What is the velocity of money? Suppose that velocity is constant and the economy's output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year ifthe Bank of Canada keeps the money supply constant? What money supply should the Bank of Canada set next year ifit wants to keep the price level stable? What money supply should the Bank ofCanada set next year if it wants ination of 10 percent? 2. Hyperinflations are extremely rare in countries whose central banks are independent of the rest of the government. Why might this be so? 3. Suppose that people expect ination to equal 3 percent, but in fact prices rise by 5 percent. Describe how this unexpectedly high ination rate would help or hurt the following: 9-957! the government a homeowner with a xed-rate mortgage a union worker in the second year of a labour contract a college or university that has invested some ofits endowment in government bonds 4. Describe the difference between foreign direct investment and foreign portfolio investment. Who is more likely to engage in foreign direct investmenta corporation or an individual investor? Who is more likely to engage in foreign portfolio investment? 5. Would each ofthe following groups be happy or unhappy if the Canadian dollar appreciated? Explain. a b. c. d. Dutch pension funds holding Canadian government bonds Canadian manufacturing industries Australian tourists planning a trip to Canada A Canadian firm trying to purchase property overseas 6. A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more countries: Country Price of a Big Mac Predicted Exchange Rate Actual Exchange Rate Indonesia 35 750 rupiah rupiah/$US 13 359 rupiah/SUS Hungary 864 forint forint/$US 252 forint/$US Czech Republic 79 koruna koruna/SUS 20.75 koruna/SUS Thailand 119 baht baht/$US 31.95 baht/SUS China 20.4 yuan yuan/SUS 6.43 yuan/$US Source: Based on data from "The Big Mac Index." The Economist Newspaper Limited, London. January 17, 2018, https: comews/2018/01/17/the-big-mac-index a. For each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Recall that the U.S. price of a Big Mac was $5.28.) How well does the theory of purchasing-power parity explain exchange rates? b. According to purchasing-power parity, what is the predicted exchange rate between the Hungarian forint and the Chinese yuan? What is the actual exchange rate? 7. Japan generally runs a significant trade surplus. Do you think this is most related to high foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese saving rate relative to Japanese investment, or structural barriers against imports into Japan? Explain your answer. 8. In fiscal year 2009-10, the Government of Canada incurred a budget deficit of $56 billion, an increase of about $50 billion from the year before. a. What effect should we expect this increase in the government's deficit to have had on Canada's net exports? b. If large deficits were to persist for many years, what would we expect would happen to levels of foreign investment in Canada? 9. Suppose that Europeans suddenly become very interested in investing in Canada. a. What happens to Canadian net capital outflow? b. What effect does this have on Canadian private saving and Canadian domestic investment? C. What is the long-run effect on the Canadian capital stock