Question

i. What are the two most important policy implication of creative destruction?

ii. suppose Canada and the US are in equilibrium with a flexible exchange rate and risk premium of 1%( Canada is riskier). The real rates of growth in Canada and the US are both 3%, but the US interest rate is 8% and the Canadian interest rate is 11%. The Canadian dollar is:

a. rising.

b. falling by 2% per year.

c. falling by 3% per year.

d. falling by 4% per year.

iii. if Canadian inflation is 4%, US inflation is 5%, and the risk differential is 1%(Canada is riskier), then Canada’s:

a. real exchange rate is falling.

b. nominal exchange rate is rising.

c. real interest rate is lower than the US real interest rate.

d. nominal interest rate is lower than the US nominal interest rate.

Answer 1

1) Creative destruction has been a schumpeter creation over the years since 1950s to discuss process of mass industrilisation to boost economic growth and development. Creative destruction helps to promote free market economies impacting productivity . Industrializaton impacts productivity , generate employment and the role of endogenous growth through entrepreneurial investments. It has affected role of new firms and start ups to boost more output and employment opportunities .

2) risk differential is calculated based on two assets bearing same interest rates , US inflation is high which means the interest rate will be lower , if canadian dollar is to fall compared to us dollar buyer of the candian dollar will face a loss. Part c,