Suppose the Canadian economy is a small open economy under a floating exchange rate and perfect capital mobility.
economics
Description
1. Suppose the Canadian economy is a small open economy under a
floating exchange rate and perfect capital mobility. Further, suppose
static exchange rate expectations and also the planned expenditure
functions follow the standard forms and assumptions. With the aid of
diagrams or equations if necessary and appropriate, explain and describe
concisely how each of the following changes, ceteris paribus, affects income,
the nominal exchange rate, and net exports at a given price level. The nominal
exchange rate here is defined as the price of a unit of foreign currency
in terms of domestic currency.
(a). A change in the demand for the risk-free asset in the
financial sector at a given nominal interest rate and real income, because of higher uncertainty arising from the
outbreak of the coronavirus pandemic and increasing
tensions between China and the United States.
(b). A change in the U.S. interest rate as a result of the Federal
Reserve System’s another round of quantitative easing program in response
to the coronavirus pandemic.
(c). A change in Canada’s net exports at a given real exchange
rate because China adopts more protectionist policies in retaliation for
Canada’s arrest of Huawei executive Meng Wanzhou.
(d)-(f). Repeat (a)-( c) above except that investors are wary of
holding assets not denominated in US dollars.
