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Complete the following
Complete the following. a) Complete the following statement.
Monetary policies are effective in affecting GDP under a flexible exchange rate system because if the central bank cuts
'interest rates, we demand (Select one)
(Select one) , so our Y rises.
foreign assets, our C$ (Select one) , our exports (Select one) and our imports
b) Complete the following statement.
Monetary policies are ineffective in affecting GDP under a fixed exchange rate system because if the central bank cuts interest rates, we demand (Select one) foreign assets, we sell C$ and demand US$, but this creates pressure for C$ to (Select one) . BOC has to sell us US$ and buy our C$, causing the money supply to (Select one) so interest rates rise back to where they were. Ultimately there is (Select one) effect on the economy.
a)
1st option : more/less
2nd : appreciate/depreciate/does not change
3rd : rise/fall/remain unchanged
4th : same as 3rd
b)
1st option : same as a)1
2nd : same as a)2
3rd : same as a)3
4th : a recessionary/an expansionary/a negligible
Expert Solution
a) Monetary policies are effective in affecting GDP under a flexible exchange rate system because if the central bank cuts interest rates, we demand "more" foreign assets, our C$ "depreciates", our exports "rise" and our imports "fall", so our Y rises.
b) Monetary policies are ineffective in affecting GDP under a fixed exchange rate system because if the central bank cuts interest rates, we demand "more" foreign assets, we sell C$ and demand US$, but this creates pressure on C$ to "depreciates". BOC has to sell us US$ and buy our C$, causing the money supply to "fall" so interest rates rise back to where they were. Ultimately there is "a negligible" effect on the economy.
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