Class Chapt 10

Question 1

4 factors that affect the DEMAND for Canadian Dollar?

Answer 1

1. The exchange rate
2. World demand for Canadian exports
3. Interest rates in Canada and other countries
4. The expected future exchange rate

Question 2

talking about demand of currency, Other things remaining the same, the higher the exchange rate?

Answer 2

the smaller is the quantity of Canadian dollars demanded

Question 3

4 facts affect the SUPPLY for Canadian Dollar?

Answer 3

1. The exchange rate
2. Canadian demand for imports
3. Interest rates in Canada and other countries
4. The expected future exchange rate (speculators buying increase currency price)

Question 4

Talking about the supply of currency, the higher the exchange rate?

Answer 4

the greater is the quantity of Canadian dollars supplied

Question 5

What is called “the Canadian interest rate differential”?

Answer 5

The Canadian interest rate minus the foreign interest rate.

Question 6

If the Canadian interest differential rises? the demand for Canadian dollar increases or decreases?

Answer 6

increases.

Question 7

If the expected future exchange rate for Canadian dollars rises, the demand curve for Canadian dollars shifts right or left?

Answer 7

shifts rightward

Question 8

What is Arbitrage? .

Answer 8

Buying in one market and selling for a higher price in another related market

Question 9

4 outcomes of Arbitrage

Answer 9

-The law of one price
- No round-trip profit
- Interest rate parity (rate of return on currency)
- Purchasing power parity (big mac index)

Question 10

3 exchange rate policies

Answer 10

1. Flexible exchange rate (no intervention)
2. Fixed exchange rate (government intervention)
3. Crawling peg (mimic other currencies)

Question 11

What is a “Balance of Payments Accounts”?

Answer 11

A country’s records of international trading, borrowing, and lending.

Question 12

What are the 3 balance of payments accounts

Answer 12

1. Current account (exports − imports + net interest income + net transfers)
2. Capital and financial account (foreign investment in Can - Can investment abroad)
3. Official settlements account (records the change in Canadian official reserves)

Question 13

what are the Canadian official reserves?

Answer 13

Government’s holdings of foreign currency

Question 14

The sum of the balances of the three accounts always equals?

Answer 14

zero.

Question 15

If a country’s net exports are positive, the country is a net supplier of funds, so the quantity of loanable funds in that country is less or more than national saving?

Answer 15

less

Question 16

What is a net debtor nation?

Answer 16

a country that during its entire history has borrowed more than it has lent.

Question 17

What is the formula for the “Current Account Balance”

Answer 17

CAB = NX + Net interest income + Net transfers (where NX is net exports)

Question 18

What is the equation for NX

Answer 18

NX = (T – G) + (S – I)

Question 19

Explain NX = (T – G) + (S – I)

Answer 19

T = net taxes
G = government expenditure on goods and services.
S = saving,
I = investment