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Suppose the Canadian exchange rate E (in terms of US$) is C$1.33 and the face values and the prices of the one-year government bonds in
- Suppose the Canadian exchange rate E (in terms of US$) 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.
- Canada: Face Value = C$12,000 and Price = C$11,650.49 United States: Face Value = US$10,000 and Price = US$9615.38
- 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.
- 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).
- 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).
- 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?
- Finally, solve for the IS curve: using the above equations obtain an expression forYin terms ofi, GandT(eliminate E).
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