Question

1 When the Bank of Canada lowers the overnight rate, the Canadian interest rate differential ________ and the Canadian dollar ________ on the foreign exchange market.

A) increases; appreciates

B) increases; depreciates

C) decreases; appreciates

D) decreases; depreciates

E) decreases; reaches interest rate parity

2. When real GDP is less than potential GDP, an increase in the quantity of money leads to a(n)

A) increase in both real GDP and the price level.

B) decrease in real GDP and an increase in the price level.

C) constant real GDP and an increase in the price level.

D) decrease in both real GDP and the price level.

E) increase in real GDP and a decrease in the price level.

3. Fiscal policies increase potential GDP if they

A) increase the quantity of inputs.

B) increase the quality of inputs.

C) create incentive effects.

D) create supply-side effects.

E) do any of the above.

Answer 1

The correct answer is D. Decrease, depricates

Because when central bank reduces interest rate then the commercial bank able generate more loans/credit at lower interest rate.

The Canadian dollar depricates because when bank of Canada reduce the interest rate the return for the foregin investor reduces due to which the Demand for Canadian dollars reduces it causes depricates in Canadian dollars.

2. The correct answer is A. Increase in both real GDP and price level.

Because when quantity of money increases, the Consumption of the people increases due to which the Real GDP inreases and price level also increases because of inrease in purchasing Power of the people.

3. The correct answer is A increase in quantity of input.

The potential GDP increases when the input (labour) inreases. It means with constant capital and technology, potential GDP increases only if the full employment quantity labour increases.