1- Using FRED codes, when was the last time that the United States and Canada we
ID: 1159212 • Letter: 1
Question
1- Using FRED codes, when was the last time that the United States and Canada were at parity with their exchange rates? What do you believe was the cause of this Parity (Consider the Net Exports component in GDP to formulate your response)?
2- Which central banks were the first to begin to reduce their reserves in US Dollars in 2006-8? What, if any was the Federal Reserve’s response (think in terms of Monetary Policy tools)? What happened to the purchasing power of US consumers during this period? Do you believe this was a factor in the collapse of the US economy?
Explanation / Answer
The Canadian dollar in FRED terms traded on parity with the US dollar, — a scenario we last saw in early 2013.
This was driven uby the following factors:
The underlying strength of the Canadian economy and the weakness of the US currency in the world markets.
The main cause for this strength of the Canadian economy were the stronger commodity prices notably that of oil. With natural resources accounting for 20 per cent of Canada's gross domestic production and more than 50 per cent of its exports, higher commodity prices helped the Canadian dollar acheive parity with the USD.
2013 was a period when the US markets were experiencing a slack labour and product market contributing to the weakness of the USD.
2- Cental banks of European countries and the Indian REserve Bank (RBI) were among the first to reduce their reserves held in USD in response to the economic crisis of 2007-08, which resulted in a reduced confidence in the performance of the usd.
With the U.S economy in grips of a deep recession in 2007, the US FED resorted to employ the most common monetary policy tools, the FED interest rates : rates were reduced to almost zero levels to improve credit availability for households and businesses.
The purchasing power of the US consumers was hit during this period as the Current account deficit which the US enjoys with other countries helps in keeping prices lower for the US consumer, once the defict begins to fall the prices rise leading to inflation thus denting the consumer's purchasing power. Thus contributing to the recession seen during this period.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.