Question

1. A lower inflation rate in Canada relative to other countries causes the Canadian dollar to appreciate because

A) Canadian real interest rates fall.

B) prices of Canadian resources fall in international markets.

C) speculators anticipate depreciation of the Canadian dollar.

D) Canadian products and services are relatively cheaper so exports to R.O.W. increase.

E) Canadian products and services are relatively cheaper so imports from R.O.W. increase.

2. An inflationary gap results from

A) appreciation of the C$ leading to increased exports.

B) depreciation of the C$ leading to increased imports.

C) appreciation of the C$ leading to decreased exports.

D) depreciation of the C$ leading to increased exports.

E) appreciation of the C$ leading to decreased imports.

3. When the inflation rate is 4 percent, the Bank of Canada will

A) buy bonds to lower interest rates and shift the aggregate demand curve rightward.

B) sell bonds to raise interest rates and shift the aggregate demand curve leftward.

C) do nothing, since an interest rate of 4 percent is desirable.

D) sell bonds to lower interest rates and accelerate the economy.

E) buy bonds to raise interest rates and slow down the economy.

4. If the annual inflation rate is 0.5 percent, the Bank of Canada will

A) sell bonds to raise interest rates and slow down the economy.

B) buy bonds to lower interest rates and accelerate the economy.

C) do nothing since an inflation rate of 0.5 percent is desirable.

D) buy bonds to raise interest rates and increase aggregate demand.

E) sell bonds to lower interest rates and increase aggregate demand.

Answer 1

1. A lower inflation rate in Canada relative to other countries causes the Canadian dollar to appreciate because Canadian products and services are relatively cheaper so exports to R.O.W. increase. When there is lower rate of inflation in Canada, goods are relatively cheaper in Canada and as a result demand for Canadian goods and services increases. This will increase the demand for Canadian dollars and Canadian dollars will appreciate. The answer is option (D).