1. Suppose the Canadian exchange rate E (in terms of US$) is C$1.33 and the face values and the prices of the one-year government bonds in Canada and the United States are as follows.
2. Canada: Face Value = C$12,000 and Price = C$11,650.49 United States: Face Value = US$10,000 and Price = US$9615.38
3. Compute the nominal interest rate on the one-year Canadian and US bonds and the expected exchange rate next year consistent with uncovered interest parity.
4. Compute the marginal propensity to consume (for both domestic goods and foreign goods) and marginal propensity to save if the consumption function isC=1.5 + 0.8(Y- T)and the trade balance isTB = 5(1-[1/E])-0.2(Y-8).
5. The investment function isI= 3-10i. What is the investment when the interest rate is equal to 10% or 0.10? Assume government spending is given byG. Write down an expression for Aggregate Demand (D).
6. Assume that the forex market equilibrium is given by:i = ([1/E]-1) + 0.10, where the two foreign returns in the right-hand side are the expected depreciation, and the foreign interest rate. What is the foreign interest rate? What is the expected future exchange rate?
7. Finally, solve for the IS curve: using the above equations obtain an expression forYin terms ofi, GandT(eliminate E).