Question

1a)Suppose Connie, a Canadian citizen, buys bonds issued by an automobile manufacturer in Sweden. Which of the following would her expenditure be?

A. Canadian foreign direct investment that would increase Canadian net capital outflow

B. Canadian foreign direct investment that would decrease Canadian net capital outflow

C. Canadian foreign portfolio investment that would increase Canadian net capital outflow

D. Canadian foreign portfolio investment that would decrease Canadian net capital outflow

1b) In the market for foreign-currency exchange in the open-economy macroeconomic model, which of the following results from a higher real exchange rate?

A. It makes Canadian goods more expensive relative to foreign goods and reduces the quantity of dollars supplied.

B. It makes Canadian goods more expensive relative to foreign goods and reduces the quantity of dollars demanded.

C. It makes foreign goods more expensive relative to Canadian goods and reduces the quantity of dollars supplied.

D. It makes foreign goods more expensive relative to Canadian goods and reduces the quantity of dollars demanded.

Answer 1

1) Since the Canadian citizen gets to invest in Swedish company, this means that there is a net capital outflow and this would be considered as a foreign direct investment increasing net capital outflow.

Therefore (A) is the answer.

2) consider Canada is the home country, and higher real exchange rate means the fat that it makes the imports from Canada more expensive or it will make the Canadian goods more expensive in the foreign countries and imports to Canada cheaper and this can get to reduce the quantity of Canadian dollars supplied which increases the value of the currency.

Therefore (A) is the answer.