URGENT:help pleasethe world interest rate is 4%, and Canada's interest rate is initially equal to 4%. Canada h

Question

Explanations about how fiscal policy affects Canada's aggregate demand are incomplete if we do not consider the crowding-out (or crowding-in) effects, effects of perfect capital mobility, and the effects of net exports. These three effects are crucial for a small open-economy such as Canada.

Suppose the world interest rate is 4%, and Canada's interest rate is initially equal to 4%. Canada has a flexible exchange rate.

If Canada's Parliament decreases government spending by $25 billion, then we expect the world interest rate to ____.

A. Remain unchanged

B. Decrease

C. Increase

If Canada's Parliament decreases government spending by $25 billion, then we would expect the Canadian dollar to ____ against the U.S. dollar. Remember that Canada has a flexible exchange rate.

A. Depreciate

B. Stay the same

C. Appreciate

If Canada's Parliament decreases government spending by $25 billion and the Bank of Canada wants a fixed exchange rate against the U.S. dollar, then the Bank of Canada should ____ U.S. dollars.

A. Sell

B. Buy

True or False: A fixed exchange rate in a small open economy magnifies the impact of fiscal policy on aggregate demand.

True

False

Answer 1

B. Decrease

A. Depreciate

A. Sell

True

Answer 2

Mexico just raised it's interest rate to 7.5% . To fight inflation .