Problem 4

You are an economic advisor to a foreign-exchange trading firm. What buy or sell recommendations for the Canadian dollar would you make in response to each of the following:

a) Faster economic growth in the European Union;

b) Expectations of higher interest rates in Canada;

c) Canadian interest rates rise, but less than expected;

d) Expected loosening of Canadian monetary policy;

e) Higher inflationary predictions for Canada. Considered each separately. Provide a one-sentence comment in each case.

Problem 5

For each of the following events, explain the short-run and long-run effects on GDP and economy-wide price levels:

a) The stock market declines sharply, reducing consumers' wealth;

b) The federal government increases spending on national defense;

c) A technological improvement raises productivity;

d) A recession overseas causes foreigners to buy fewer Canadian goods. For each briefly comment on the impact, if any, on the AD, SAS and LAS curves assuming policymakers take no action to intervene in the market. One or two sentences of explanation is sufficient. Each event should be considered separately and independently.

Problem 6

Outline your agreement or disagreement with each of the following statements. Provide a brief explanation of your conclusion.

a) If the Bank of Canada lowers its target rate of inflation, it would have a profound impact on Canadian bond prices and dividend-paying stocks.

b) The Bank of Canada's monetary policy can keep inflation at 2% as long as the growth of the money supply doesn't exceed 2%.

c) The Federal Reserve Board has a couple of tools available to prevent the US dollar from dropping below a desired level, but these policy instruments have limitations and potential negative side effects.