Question

A. True or false (9 marks total) For each of the statements in Section A, determine whether it is true or false, then explain in a few sentences why that is the answer. Note: no marks will be given for answers that do not include an explanation.

1. In practice, the Bank of Canada sets a target for real money balances and then the interest rate automatically adjusts to ensure this target is met.

2. In the Mundell-Fleming model, in general the level of domestic investment could depend both on foreign and domestic economic conditions.

3. The Solow model attempts to explain growth in output over the very long run through increases in the capital stock, reductions in the unemployment rate, and increases in technology.

Answer 1

1. False

Reason:- In June 1994 The bank emphasized on the target from the overnight rate. At that time this rule was applicable of daily adjustments. But in the year 2000, the bank of canada introduced anew system of eight fixed or pre dates for changing in the interest rate.

2. True

Reason-Firat of all the model is applicable in open economy. Assumption of perfect capital mobility plays an important rile in tbia model. Let us assume a situation when domestic interest rate is low than the world interest rate, the capital outflow would be reduced. The model focuses on the adoption of fixed exchange rate system or flexible exchange rate system. under perfect capital mobility , monetary policy will work with flexible exchange rate and fiscal policy will with fixed exchange rate.

3. True

REASON:- The solow model emphasize on the substitutability between labour and capital. He believed technical coefficients of production to be variable. He considered continuous production with the growth period.

The long run growth is determined by increasing labor and technology.