Question

In: Economics

. Discuss the impact of higher economic growth on the exchange rate of the Canadian dollar...

. Discuss the impact of higher economic growth on the exchange rate of the Canadian dollar according to

  1. the monetary approach to the exchange rate model. Why does the model makes this prediction?
  2. The Keynesian approach to the exchange rate model. Why does the model makes this prediction?

Solutions

Expert Solution

When there is a high economic growth in the economy that implies the country is having good production. So in case of that, the standard of the country's economy upgraded. so the exchange rate appreciated. When the exchange rate appreciated there will be high value of export and low value for the foreign imported product. it pushes the interest rate. interest rates as the monetary policy variable are faced with a potential bias against finding a stabilizing effect of high-interest rates on exchange rates. so it needs to partially accommodate of exchange market pressure by the monetary authorities. so the effect of that is higher interest rates and a high exchange value for the Canadian dollar.

2. If we will try to present the economic growth with the exchange rate in the Keynesian model, the prediction will be the shifting of aggregate demand will increase the interest rate which will lead to a high price in domestic products and that will make the export costlier. so the impact on the exchange rate will be the same as the monetary policy and the country may face an inward shift in AD and as the import is cheaper so the supply of foreign goods will be cheaper so the AS will shift outward.


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