Fill in the blanks for the follow questions a) and b). The options for a) when i

Question

Fill in the blanks for the follow questions a) and b).

The options for a) when it says "Select one" are: more/less, appreciate/depreciate/does not change, rise/fall/remain unchanged, rise/fall/remain unchanged

The options for b) when it says "Select one" are: more/less, appreciate/depreciate/does not change, rise/fall/remain unchanged, a recessinary/an expansionary/a negligible

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) foreign assets, our C$ (Select one), our exports (Select one) and our imports (Select one), so our Y rises 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 CS 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.

Explanation / Answer

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$ "Depretiates", our exports "Rise" and our imports "Fall", so our Y rises.

Explanation: Interest rates are the incentive for keeping monetary assets with the bank or in bonds. If the rates fall investors will look for venues which have higher rates so that they can reap more benefits. This will lead to a surge in demand for foreign assets, weakening of local currency which stimulates exports and imports fall.  

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.

Explanation: In a fixed currency market reducing interest rates cause monetary flight and people look for better options abroad, but they have to sell their currency and buy foreign currency. This will reduce the demand for local currency and depreciates its value. The monetary supply falls, to stop the trend the central bank has to increase the interest rates back causing zero or negligible effect on the economy.   

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