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Question 4 - supply in both countries are unknown(b Answer...

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Question 4 (a) Answer: Uncertain Quantitative Easing means increasing money supply by printing more money. If both Canada and Australia use this monetary approach, money supply in both countries will increase. By the fundamental equation of the monetary approach, (Assuming Canada is home country)we have: E C$/A$ = = PcPA / ( , ) / ( , )= *( ( , MSC LC Rc Yc MSA LA RA YA MSCMSA LA RA ( , )) YALC RC YC So in this case, domestic money supply increases: MSC => PC => / ( , ) MSC LC Rc Yc => E C$/A$ => $C depreciate Foreign money supply also increases, so by the equation above, we also have: MSA => PA => / ( , ) MSA LA RA YA => E C$/A$ => $C appreciate We do not know whether $C will appreciate or depreciate since the increments of money
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Unformatted text preview: supply in both countries are unknown. (b) Answer: False Withdrawing fiscal stimulus can have serious impact on interest rate and supply of money if the timing is wrong. For example, this may affect income in a bad way such that people spend money so much which may also causing serious problem with interest rate, once the interest rate is affected, exchange rate will change. Nominal value of $C may not change since E C$/A$ may be stable, but since the price level changes a lot, real value of $C may suffer a fluctuation...
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