Question 1

Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%,while interest rates in other countries do not change.How will this policy action affect Canada's imports and exports?

Accepted Answer

When the Bank of Canada raises its target for the overnight interest rate, it makes holding Canadian dollars more attractive to investors, leading to an appreciation of the Canadian dollar. This appreciation makes foreign goods cheaper for Canadians, thereby encouraging imports into Canada.

Question 2

World commodity prices increased significantly over the years 2002-2008.Since Canada is a large exporter of commodities,it is not surprising that over this time period Canada experienced

Accepted Answer

When world commodity prices increase, countries that are large exporters of commodities tend to experience a corresponding appreciation of their currency since demand for their exports increases, leading to an increase in demand for their currency. Therefore, it is likely that Canada experienced a significant appreciation of its currency against the U.S. dollar during the years 2002-2008.

Question 3

If the central bank pegs the exchange rate below its free-market equilibrium level,there will be an ________ of/for foreign exchange,and the central bank will ________ foreign currency.

Accepted Answer

If the central bank pegs the exchange rate below its free-market equilibrium level, it creates an excess demand for foreign exchange since the demand for foreign exchange increases due to the artificially low exchange rate. Therefore, the central bank will need to sell its own currency to purchase the foreign currency to maintain the pegged rate. Hence, the correct option is D, excess demand, and sell.

Question 4

Suppose two countries,A and B,are trading with each other.Suppose also that the rate of inflation in B is higher than in A.There will be

Accepted Answer

When the rate of inflation in Country B is higher than in Country A, it generally makes Country B's goods more expensive relative to Country A's goods. This tends to decrease the demand for Country B's exports and increase its imports, as Country A's goods become relatively cheaper. Consequently, there will be more of Country B's currency available in the foreign exchange market as it buys more from Country A, leading to an increase in the supply of Country B's currency.

Question 5

If the Bank of Canada pursues a contractionary monetary policy,interest rates in Canada will

Accepted Answer

A contractionary monetary policy typically involves increasing interest rates to reduce inflation and slow down economic growth. Higher interest rates make Canadian investments more attractive, leading to a capital inflow and an appreciation of the Canadian dollar.

Question 6

Consider a country that is operating under a fixed exchange-rate system.The country's balance of payments will always show total debits equal to total credits because

Accepted Answer

In a fixed exchange-rate system, the central bank of the country will intervene in the foreign exchange market to maintain a fixed exchange rate. This often requires the use of official financing to purchase or sell foreign currency. Any deficit or surplus in the rest of the balance of payments accounts will be offset by this official financing, ensuring that total debits equal total credits.

Question 7

If the central bank pegs the exchange rate above its free-market equilibrium level,there will be an ________ of/for foreign exchange,and the central bank will ________ foreign currency.

Accepted Answer

When the central bank pegs the exchange rate above its free-market equilibrium level, it makes the domestic currency artificially expensive, leading to an excess supply of foreign exchange as fewer people want or can afford to buy the expensive domestic currency. To maintain this pegged rate, the central bank will purchase foreign currency, using its reserves to buy the excess supply and support the domestic currency's artificially high value.

Question 8

Suppose the Bank of Canada fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free-market equilibrium exchange rate would otherwise be Cdn$1.25,then the

Accepted Answer

If the free-market equilibrium exchange rate would be Cdn$1.25 to the U.S. dollar, it means the Canadian dollar is weaker than the target range set by the Bank of Canada. To strengthen the Canadian dollar (or to move the exchange rate back into the target range), the Bank of Canada must sell U.S. dollars from its reserves. This action increases the demand for Canadian dollars relative to U.S. dollars, thereby appreciating the Canadian dollar towards the desired range.

Question 9

The Chinese government fixes its exchange rate above its free-market equilibrium level.Its purpose in keeping the Chinese currency depreciated is probably to

Accepted Answer

By fixing the exchange rate of the yuan below its free-market equilibrium value, the Chinese government is making exports cheaper for other countries to purchase, thereby making them more attractive. This policy helps boost Chinese exports, which in turn helps the Chinese economy by increasing demand for Chinese goods, creating jobs, and generating income for Chinese firms.

Question 10

Suppose Canada's central bank fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free market equilibrium exchange rate would otherwise be Cdn$1.05,then

Accepted Answer

If the free market equilibrium exchange rate is Cdn$1.05 and the central bank fixes the exchange rate between Cdn$1.10 and Cdn$1.20, then the Canadian dollar is relatively overvalued. This would mean that Canadians would want to buy more American goods and services, while Americans would want to buy fewer Canadian goods and services. This would result in a net outflow of Canadian dollars from the country, putting downward pressure on the value of the Canadian dollar. To maintain the fixed exchange rate, Canada's central bank would need to buy U.S. dollars to supply the domestic demand for dollars. This would lead to a decrease in the supply of Canadian dollars, which would put upward pressure on its value, helping to maintain the fixed exchange rate.

Question 11

Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%,while interest rates in other countries do not change.The result will be

Accepted Answer

When the Bank of Canada raises its target for the overnight interest rate, it makes investments in Canada more attractive, leading to an inflow of financial capital. The increase in demand for Canadian dollars that follows from the inflow of financial capital leads to an appreciation of the Canadian dollar.

Question 12

Suppose Canada has a flexible exchange rate.If there is a rise in the world price of copper (a major Canadian export),other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar.

Accepted Answer

When the world price of copper rises, demand for Canadian copper increases, leading to a higher demand for Canadian dollars to pay for the copper. This increased demand causes the Canadian dollar to appreciate. Other exporting sectors may contract because their goods become more expensive for foreign buyers due to the stronger Canadian dollar.

Question 13

The diagram below shows the market for foreign exchange from the perspective of Canada.The demand for foreign exchange is  and the supply of foreign exchange varies between  and  ,with an average of  .  FIGURE 34-4 Refer to Figure 34-4.Suppose the Bank of Canada pegs the exchange rate at  and the supply curve is  .The Bank would have to ________ foreign exchange in the amount of ________ per month.

Accepted Answer

The answer of The diagram below shows the market for...

Question 14

Under a system of flexible exchange rates,a nation which tightens its monetary policy would be likely to experience

Accepted Answer

Tightening monetary policy typically leads to higher interest rates, which attract foreign capital, leading to an appreciation of the nation's currency.

Question 15

Assume exchange rates are flexible.Other things being equal,a contractionary monetary policy in Canada will tend to cause a(n)

Accepted Answer

A contractionary monetary policy in Canada typically leads to higher interest rates, attracting foreign capital and increasing demand for the Canadian dollar, causing it to appreciate.

Question 16

Suppose Canada has a flexible exchange rate.If there is a decline in the world price of copper (a major Canadian export),other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar.

Accepted Answer

A decline in the world price of copper would lead to a decrease in demand for the Canadian dollar, causing it to depreciate. This depreciation makes other Canadian exports cheaper and more competitive internationally, likely leading to an expansion in other exporting sectors.

Question 17

China fixes its exchange rate (yuan per units of foreign currency)at a rate above its free-market equilibrium level,which means that China is keeping the external value of the yuan

Accepted Answer

By fixing the exchange rate above the free-market equilibrium, China is keeping the yuan's value artificially low, making its exports cheaper and more competitive internationally.

Question 18

China fixes its exchange rate (yuan per units of foreign currency)at a rate above its free-market equilibrium level.In order to maintain this exchange rate,and to prevent its currency from ________,the Chinese central bank must be accumulating ________.

Accepted Answer

When a country fixes its exchange rate at a rate above its free-market equilibrium level, its currency becomes overvalued and prone to appreciation. To prevent appreciation, the central bank must be accumulating foreign-exchange reserves by buying foreign currencies in exchange for its domestic currency. This increases the demand for foreign currencies, thus preventing appreciation and maintaining the fixed exchange rate.

Question 19

If the Bank of Canada pursues an expansionary monetary policy,

Accepted Answer

Expansionary monetary policy typically involves lowering interest rates to stimulate economic growth. Lower interest rates make borrowing cheaper, which can lead to a capital outflow as investors seek higher returns elsewhere. This increased supply of the Canadian dollar in foreign exchange markets can lead to depreciation of the currency.

Question 20

We can expect that an increase in Canadian interest rates caused by a monetary contraction would

Accepted Answer

An increase in Canadian interest rates caused by a monetary contraction would make Canadian bonds more attractive to foreign investors, leading to an increase in demand for the Canadian dollar and an increase in its external value. This would make imports cheaper and exports more expensive, leading to a decrease in Canadian exports. It may also lead to a decrease in Canada's current account balance as imports become cheaper, leading to an increase in imports and a decrease in exports. Monetary contraction can be carried out by the Bank of Canada, and it may also choose to take offsetting actions to mitigate the effects of the interest rate hike.

Quiz 34: Exchange Rates and the Balance of Payments

Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%,while interest rates in other countries do not change.How will this policy action affect Canada's imports and exports?

World commodity prices increased significantly over the years 2002-2008.Since Canada is a large exporter of commodities,it is not surprising that over this time period Canada experienced

If the central bank pegs the exchange rate below its free-market equilibrium level,there will be an of/for foreign exchange,and the central bank will foreign currency.

Suppose two countries,A and B,are trading with each other.Suppose also that the rate of inflation in B is higher than in A.There will be

If the Bank of Canada pursues a contractionary monetary policy,interest rates in Canada will

Consider a country that is operating under a fixed exchange-rate system.The country's balance of payments will always show total debits equal to total credits because

If the central bank pegs the exchange rate above its free-market equilibrium level,there will be an of/for foreign exchange,and the central bank will foreign currency.

Suppose the Bank of Canada fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free-market equilibrium exchange rate would otherwise be Cdn$1.25,then the

The Chinese government fixes its exchange rate above its free-market equilibrium level.Its purpose in keeping the Chinese currency depreciated is probably to

Suppose Canada's central bank fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free market equilibrium exchange rate would otherwise be Cdn$1.05,then

Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%,while interest rates in other countries do not change.The result will be

Suppose Canada has a flexible exchange rate.If there is a rise in the world price of copper (a major Canadian export) ,other exporting sectors of the Canadian economy will likely due to the resulting of the Canadian dollar.

Under a system of flexible exchange rates,a nation which tightens its monetary policy would be likely to experience

Assume exchange rates are flexible.Other things being equal,a contractionary monetary policy in Canada will tend to cause a(n)

Suppose Canada has a flexible exchange rate.If there is a decline in the world price of copper (a major Canadian export) ,other exporting sectors of the Canadian economy will likely due to the resulting of the Canadian dollar.

China fixes its exchange rate (yuan per units of foreign currency) at a rate above its free-market equilibrium level,which means that China is keeping the external value of the yuan

China fixes its exchange rate (yuan per units of foreign currency) at a rate above its free-market equilibrium level.In order to maintain this exchange rate,and to prevent its currency from ,the Chinese central bank must be accumulating .

If the Bank of Canada pursues an expansionary monetary policy,

We can expect that an increase in Canadian interest rates caused by a monetary contraction would

Quiz 34: Exchange Rates and the Balance of Payments

Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%,while interest rates in other countries do not change.How will this policy action affect Canada's imports and exports?

World commodity prices increased significantly over the years 2002-2008.Since Canada is a large exporter of commodities,it is not surprising that over this time period Canada experienced

If the central bank pegs the exchange rate below its free-market equilibrium level,there will be an ________ of/for foreign exchange,and the central bank will ________ foreign currency.

Suppose two countries,A and B,are trading with each other.Suppose also that the rate of inflation in B is higher than in A.There will be

If the Bank of Canada pursues a contractionary monetary policy,interest rates in Canada will

Consider a country that is operating under a fixed exchange-rate system.The country's balance of payments will always show total debits equal to total credits because

If the central bank pegs the exchange rate above its free-market equilibrium level,there will be an ________ of/for foreign exchange,and the central bank will ________ foreign currency.

Suppose the Bank of Canada fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free-market equilibrium exchange rate would otherwise be Cdn$1.25,then the

The Chinese government fixes its exchange rate above its free-market equilibrium level.Its purpose in keeping the Chinese currency depreciated is probably to

Suppose Canada's central bank fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free market equilibrium exchange rate would otherwise be Cdn$1.05,then

Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%,while interest rates in other countries do not change.The result will be

Suppose Canada has a flexible exchange rate.If there is a rise in the world price of copper (a major Canadian export) ,other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar.

Under a system of flexible exchange rates,a nation which tightens its monetary policy would be likely to experience

Assume exchange rates are flexible.Other things being equal,a contractionary monetary policy in Canada will tend to cause a(n)

Suppose Canada has a flexible exchange rate.If there is a decline in the world price of copper (a major Canadian export) ,other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar.

China fixes its exchange rate (yuan per units of foreign currency) at a rate above its free-market equilibrium level,which means that China is keeping the external value of the yuan

China fixes its exchange rate (yuan per units of foreign currency) at a rate above its free-market equilibrium level.In order to maintain this exchange rate,and to prevent its currency from ________,the Chinese central bank must be accumulating ________.

If the Bank of Canada pursues an expansionary monetary policy,

We can expect that an increase in Canadian interest rates caused by a monetary contraction would

If the central bank pegs the exchange rate below its free-market equilibrium level,there will be an of/for foreign exchange,and the central bank will foreign currency.

If the central bank pegs the exchange rate above its free-market equilibrium level,there will be an of/for foreign exchange,and the central bank will foreign currency.

Suppose Canada has a flexible exchange rate.If there is a rise in the world price of copper (a major Canadian export) ,other exporting sectors of the Canadian economy will likely due to the resulting of the Canadian dollar.

Suppose Canada has a flexible exchange rate.If there is a decline in the world price of copper (a major Canadian export) ,other exporting sectors of the Canadian economy will likely due to the resulting of the Canadian dollar.

China fixes its exchange rate (yuan per units of foreign currency) at a rate above its free-market equilibrium level.In order to maintain this exchange rate,and to prevent its currency from ,the Chinese central bank must be accumulating .