AK Macroeconomics – Chapter 11
CHAPTER ELEVEN
Answers to Self-Test Questions
1. a) 5 Swedish Krona (1/0.20);
b) 1.4 cents or 0.014 dollars (1/70)
2. a)
b)
c)
d)
appreciate
appreciate
appreciate
no change
3. a) Imports would rise as foreign products become relatively cheaper for Canadians.
b) Exports would fall as Canadian products would become relatively more expensive
for foreigners.
4. a), d) and e) would all cause the Canadian dollar to appreciate.
5. a)
b)
c)
d)
the Canadian dollar would depreciate
the level of aggregate demand would decrease
the level of GDP would decrease
the price level would decrease
6. a) The Canadian dollar will appreciate.
b) There will be a shortage of Canadian dollars on the world market because of the
higher demand for Canadian dollars so that the Bank of Canada will need to
increase the money supply in order to address this shortage. Doing this will,
eventually, lead to inflation.
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AK Macroeconomics – Chapter 11
7. Canada’s Balance of Payments
Demand for Canadian Dollars
Current Account
Exports of goods
& services
164
Supply of Canadian Dollars
Import of goods
& services
162
Balance of Trade
Factor income
paid
23
Net foreign
factor income
Transfers
paid abroad
30
Transfers (net)
Balance on Current Account
Foreign factor income
from abroad
8
Transfers received
from abroad
26
Capital Account
Foreign Investment
in Canada
204
Canadian Investment
abroad
186
Net foreign Investment
Balance on Capital Account
Overall Balance
(current + capital)
Official Settlements Account
(Foreign reserves bought)
Canadian dollars sold
Total Balance (Current + Capital + Official Settlements)
1. False: it is worth 5 balboas
2. True
3. True
4. False: a demand for Canadian dollars
5. True
6. False: the effective price decreases and exports will increase
7. True
8. True
9. True
10. True
b
b
b
b
b
16.
17.
18.
19.
20.
d
b
d
b
d
21.
22.
23.
24.
25.
a
d
e
a
c
26.
27.
28.
29.
30.
94
a
d
c
b
c
31.
32.
33.
34.
35.
+2
- 15
−4
−17
+18
+18
+1
̶ 1
0
Answers to Study Guide Questions
11.
12.
13.
14.
15.
Balance
b
c
b
a
d
AK Macroeconomics – Chapter 11
36A.
Key Problem
a) See the following table:
Table 11.9 (completed)
Value of
Cdn $ in
US $
Demand for Canadian Dollars
Exports
Factor
Foreign
of Goods income Investment
&
Earned
in Canada
Services Abroad
$0.84
0.86
0.88
0.90
0.92
0.94
0.96
0.98
1.00
1.02
1.04
$120
119
118
117
116
115
114
113
112
111
110
$70
70
70
70
70
70
70
70
70
70
70
$180
175
170
165
160
155
150
145
140
135
130
Total
$370
364
358
352
346
340
334
328
322
316
310
Supply of Canadian Dollars
Imports Foreign
Canadian
of Goods
factor
Investment
&
income
Abroad
Services
Paid
Abroad
$80
$67
$146
83
67
148
86
67
150
89
67
152
92
67
154
95
67
156
98
67
158
101
67
160
104
67
162
107
67
164
110
67
166
b) Canadian dollar: $0.98 US
c) balance of trade: + $12 (Exports of $113 – imports of $101)
d) current account balance: + $15 ($183 – $168)
e) capital account balance: – $15 ($145 – $160)
f) total balance of payments: zero ($ 328 = 328)
g) balance of trade: + $16 ($114 – 98)
h) current account balance: + $19 ($184 – $165)
i) capital account balance: – $8 ($150 – $158)
j) overalll balance of payments: + $11 ($334 – $323)
k) official settlements of account balance: – $11 (to offset the + $11 in j)
37A.
a) 30 euros (42/1.40)
b) 20 pounds (42/2.10)
38A.
a) $1.33 Cdn (1/0.75)
b) $0.0125 Cdn.(1/80)
c) 0.625 euros (1/1.6)
39A.
a) The Canadian businesswoman will be selling Canadian dollars to buy Japanese
yen
b) The Russian tourist will be buying dollars to spend in Cape Breton.
c) The American corporation will be buying Canadian dollars in order to purchase
the building in Saskatoon.
95
Total
$293
298
303
308
313
318
323
328
333
338
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AK Macroeconomics – Chapter 11
d) The Canadian bank will be selling Canadian dollars to buy American dollars to
expand its operations in the US.
40A.
a) hurt (It will cost him more to buy Canadian dollars with his euros)
b) benefit (His Canadian dollars will now buy him more American dollars.
c) hurt (Their British pounds will now buy fewer Canadian dollars.)
d) hurt (The American dollars that she earns will be worth less where she lives in
Canada).
41A.
a) appreciate (Mexican investors will want to put their money in Canada where
they can earn a higher return)
b) depreciate (Canadians will be getting rid of Canadian dollars and buying
American dollars.)
c) appreciate (The Mexican government will be buying Canadian dollars in order
to buy the equipment.)
d) appreciate (Because the crops will be more expensive, Canadians will be
buying less and purchasing fewer Mexican pesos.)
42A.
Demand for Canadian Dollars
Current Account
Exports of goods
& services
157
Foreign factor income
from abroad
11
Transfers received
from abroad
Capital Account
Foreign Investment
in Canada
90
Official Settlements Account
(Foreign reserves bought)
Supply of Canadian Dollars
Import of goods
& services
153
Balance of Trade
Factor income
paid
29
Net foreign
factor income
Transfers
paid abroad
Transfers (net)
Balance on Current Account
Canadian Investment
abroad
68
Net foreign Investment
Balance on Capital Account
Overall Balance
(current + capital)
Canadian dollars sold
Total Balance (Current + Capital + Official Settlements)
a) + $4;
Balance
+4
−18
+4
−10
+22
+22
+ 12
̶ 12
0
b) – 10; c) + 22; d) surplus of 12
43A. The supply of Canadian dollars comes from Canadians who exchange them in order
to obtain foreign currencies.
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AK Macroeconomics – Chapter 11
44A. Arbitrage is the practice of buying a commodity in a market where it is
comparatively cheap and re-selling in a second market where it is expensive.
5A. a) 0.71 euros;
60 yen;
0.72 US$
In box 1, 2000 euros were exchanged for $2800 Canadian
1 $Canadian = 2000/2800
In box 2, 3000 yen were exchanged for $50 Canadian
1 $Canadian = 3000/50
In box 3, $3600 U.S. were exchanged for $5000 Canadian
1 $Canadian = 3600/5000
46A. Many years of a capital account surplus means a significant inflow of financial
capital from foreign sources. Dividends and interest payments will then begin to flow
back to those foreign sources over many more years. Since these latter payments
show up in the current account as an outflow, it is unlikely that any balance of trade
surplus will be sufficient to offset them. The result is many years of current account
deficits.
47A. Exchange rate: up because the demand for the Canadian dollars will be higher;
GDP: up; because the demand for Canadian exports will increase
Unemployment: down because the increase in exports will boost both GDP and
employment.
48A.
a) $60B
b) $59.4B US (i.e. $60B x 0.99)
c) See figure below:
Figure 11.10 (completed)
1.05
Price of Canadian dollars in US
1.03
dollars
S1
1.01
0.99
D2
0.97
D1
0.95
0
20
40
60
80
100
Quantity of Canadian dollars (billions)
97
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AK Macroeconomics – Chapter 11
c) quantity of Canadian $ exchanged: $80B (The central bank would have to make
this amount available since only $60 is supplied by the market.)
d) $70B (The new equilibrium.)
e) $70B US (i.e. $70B x 1.00)
49A If the Canadian dollar appreciates then the effective price of Canadian products will
also rise. This is because anyone who wants to buy Canadian dollars in order to buy our
products (or assets) will now pay more in terms of foreign currencies. (For them, it is
effectively the same as if the prices of the products themselves had increased.) As a result,
the volume of Canadian exports will decrease.
50A. A flexible (or floating) exchange rate is one where there is no government
intervention in its determination; the exchange rate is determined solely by the market, i.e.
through the forces of supply and demand. A fixed exchange rate, on the contrary, is one
whose value is fixed by the government in terms of the currency of another country.
(Though the rate may initially be close to the long-term market value.)
51A. This question involves the classic distinction between an increase in demand for the
Canadian dollar which is, graphically, a rightward shift in the demand curve compared
to a decrease in the quantity demanded which is, graphically, a movement up along the
demand curve.
52A. If the demand for the currency increases---say because of increased exports---then
foreign money will flow into the country. In order to defend the fixed exchange rate,
the country’s central bank will have to buy this foreign currency with domestic
currency and this will increase the country’s money supply. While this will eventually
be inflationary, with a fixed exchange rate there is nothing that can be done with
monetary policy to change the situation.
53A. a) Real Exchange Rate = 0.80 (32 000/18 000 x 0.45)
b) Canada The SUV sells for $32 000 in Canada and for $40 000 (18 000
pounds/0.45) in the United Kingdom.
54A. a) 1 Yuan = $0.25 Canadian (2.50/10.00);
1 Singapore $ = $0.71 Canadian (2.50/3.50);
1 Hong Kong $ = $0.125 Canadian. (2.50/20.00)
b) Yuan is undervalued. (Its market value is less than the “real” Big Mac value.)
Singapore dollar is overvalued. (Its market value isgreater than the “real” Big
Mac value.)
Honk Kong dollar is overvalued. (Its market value isgreater than the “real” Big
Mac value.)
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AK Macroeconomics – Chapter 11
c) China: increase (because their currency is undervalued which means their
products are cheaper for Canadians);
Singapore: decrease (because their currency is overvalued which means their
products are more expensive for Canadians);
Hong Kong: decrease (because their currency is overvalued which means their
products are more expensive for Canadians);
55A. The purchasing power parity theory suggests that in the long-run all currencies will
have equal purchasing power, i.e. that $100 in Canada will afford you exactly the
same bundle of goods as will the equivalent amount of Yen in Japan or the
equivalent amount of Euros in Europe.
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AK Macroeconomics – Chapter 11
100