Question

For each of the following cases, determine whether an individual should buy Canadian bonds or foreign bonds.

a.    i = 4%, i* = 6%, expected depreciation of our dollar of 3%

b.    i = 4%, i* = 6%, expected depreciation of our dollar of 1%

c.    i = 6%, i* = 5%, expected depreciation of our dollar of 3%

d.    i = 6%, i* = 5%, expected depreciation of our dollar of 2%

e.    i = 5%, i* = 5%, expected appreciation of our dollar of 2%

Use the open economy IS-LM model presented in class to answer the following questions:

a. What are the effects of a decrease in foreign output (Y*) on domestic output (Y) and   domestic interest rate (i)? [ show on the IS-LM graph].

            b. What are the effects on consumption ( C ), investment (I), and net exports (NX)?

c. What are the effects of an increase in foreign interest rate (i*) on domestic output (Y) and domestic interest rate (i)? [ show on the IS-LM graph].

d. What are the effects on consumption ( C ), investment (I), and net exports (NX)?

e. What are the effects of a contractionary fiscal policy abroad on the Canadian output and interest rate? [show on the IS-LM graph]

f. What are the effects pf a contractionary monetary policy abroad on the Canadian output and interest rate? [show on the IS-LM graph]

Answer 1