The irp applies to financial assets while the ppp

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Chapter 3 / Exercise 3-10
Accounting
Reeve/Warren
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The IRP applies to financial assets while the PPP applies to goods and servicesImplications of the IRP Theory for Exchange Rates-If domestic (real) interest rate goes down relative to the rest of the world, (eg US), all other things equal, investors will prefer to invest outside Canada-This means that investors will sell their Canadian assets (in Canadian $) and buy foreign assets (in US $ for example)-So supply of Canadian $ goes up, which means that the price of Canadian $ goes down, in other words the Canadian $ depreciates-The reverse happens if domestic real interest rate goes upLimitations to Interest Rate Parity-Real interest rate in Canada is not always equal to the real interest rate in the rest of the world for two reasons:-Financial assets carry with them the possibility of defaults – For example, a reason why interest rates on Canadian government bonds are typically higher than US government bonds is that Canada is perceived as having a higher risk of default-Financial assets offered for sale in different countries are often not perfect substitutes. In particular, they are taxed the same way by the respective government
Midterm9 – 2510 – 2011 – 3012 – 2335 MC, 10 T/F, 3 shot answerBank Rate: rate that Bank of Canada charges to commercial banksOvernight rate: rate that commercial banks charge to each other for short-term loans (0.25 less than bank rate)What is the impact of a change in bank rate on money supply?-What is impact of an increase in bank rate?
Final exam, April 19, 9:30-12:30 Gym D, E
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Chapter 3 / Exercise 3-10
Accounting
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Chapter 14: Aggregate Demand and Aggregate Supply-In macroeconomics, we are concerned with two types of issues:1. Long-run economic growth (Chapter 7)2. Short run economic fluctuations (ie. The economy’s deviations from its long-run growth path)Key objectives of Chapter 14:-Provides an introduction to economic fluctuations-Develop a model of aggregate demand and aggregate supply to explain economic fluctuations-See what the government/Bank of Canada can do to soften economic fluctuationsShort run economic fluctuations-Economic activity fluctuates from year to year-In most years production of goods and services rises-On average over the past 130 ears, production in the Canadian economy (ie, real GDP per person) has grown by about 2% per year-In some years normal growth does not occur, causing a recessionDefinitions-A recession is a period of declining real incomes, and rising unemployment-A depression is a severe recessionThree facts about economic fluctuations1. Economic fluctuations are irregular and unpredictable-Fluctuations in the economic are often called the business cycle2. Most macroeconomic variables fluctuate together, but by different amounts3. As output falls, unemployment rises

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