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Module 4-Practice Questions

ECON102

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10 views3 pages

Module 4-Practice Questions

ECON102

Uploaded by

lisa xu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Module 4-Practice Questions

Chapter 12:
1. How would the following transactions affect Canada’s exports, imports, and net
exports?
a. A Canadian art professor spends the summer touring museums in Europe.
b. Students in Paris flock to the latest Diana Krall concert.
c. Your uncle buys a new Volvo.
d. The student bookstore at Oxford University sells a pair of Bauer hockey skates.
e. A Canadian citizen shops at a store in northern Vermont to avoid Canadian sales taxes.

2. How would the following transactions affect Canada’s net capital outflow? Also, state
whether each involves direct investment or portfolio investment.
a. A Canadian cellular phone company establishes an office in the Czech Republic.
b. Harrod’s of London sells shares to the Ontario Teachers’ Pension Plan.
c. Honda expands its factory in Alliston, Ontario.
d. A Bank of Montreal mutual fund sells its Volkswagen shares to a French investor.

3. Would each of the following groups be happy or unhappy if the Canadian dollar
appreciated? Explain.
a. Dutch pension funds holding Canadian government bonds
b. Canadian manufacturing industries
c. Australian tourists planning a trip to Canada
d. A Canadian firm trying to purchase property overseas
4. What is happening to Canada’s real exchange rate in each of the following situations?
Explain.
a. Canada’s nominal exchange rate is unchanged, but prices rise faster in Canada than
abroad.
b. Canada’s nominal exchange rate is unchanged, but prices rise faster abroad than in
Canada.
c. Canada’s nominal exchange rate declines, and prices are unchanged in Canada and
abroad.
d. Canada’s nominal exchange rate declines, and prices rise faster abroad than in Canada.

5. A can of pop costs $0.75 in Canada and 12 pesos in Mexico. What would the peso–
dollar exchange rate be if purchasing-power parity holds? If a monetary expansion caused all
prices in Mexico to double, so that the price of pop rose to 24 pesos, what would happen to
the peso–dollar exchange rate?

Chapter 13:
1. Japan generally runs a significant trade surplus. Do you think this is most related to high
foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese
saving rate relative to Japanese investment, or structural barriers against imports into Japan?
Explain your answer.

2. How would an increase in foreigners’ incomes affect Canada’s net exports curve? How
would this affect the value of the dollar in the market for foreign-currency exchange?
3. Suppose that Parliament passes an investment tax credit, which subsidizes domestic
investment. How does this policy affect national saving, domestic investment, net capital
outflow, the interest rate, the exchange rate, and the trade balance?

4. In fiscal year 2009–10, the Government of Canada incurred a budget deficit of $56
billion, an increase of about $50 billion from the year before.
a. What effect should we expect this increase in the government’s deficit to have had on
Canada’s net exports?
b. If large deficits were to persist for many years, what would we expect would happen to
levels of foreign investment in Canada?

5. Suppose the French suddenly develop a strong taste for British Columbia wines. Answer
the following questions in words and using a diagram:
a. What happens to the demand for dollars in the market for foreign-currency exchange?
b. What happens to the value of dollars in the market for foreign-currency exchange?
c. What happens to the quantity of net exports?

6. A Member of Parliament (MP) renounces her past support for protectionism: “Canada’s
trade deficit must be reduced, but import quotas only annoy our trading partners. If we
subsidize Canadian exports instead, we can reduce the trade deficit by increasing our
competitiveness.” Using a two-panel diagram, show the effect of an export subsidy on net
exports and the real exchange rate. Do you agree with the MP?

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