PART I: Long-answer question

Question 1.1

Suppose Canada is facing an inflationary gap, and the Bank of Canada wants to use monetary policy to stabilize the economy. What kind of policy should it follow? How will it impact bond prices, interest rates, investment, the exchange rate, net exports, real GDP, and the price level. Illustrate your analysis graphically with explanations.

PART II: Short-answer questions

Question 2.1

Suppose you work for a Canadian company that exports goods to the United States. Explain how Bank of Canada's decision to cut the policy rate would impact the Canadian dollar rate against US dollar and your company's business.

Question 2.2

Explain the Crowding-Out Effect of Fiscal Policy implemented during a recession by using an example.

Question 2.3

Suppose Canada accepted relatively more number of immigrants, and as a result, relatively more money transfers were made from Canada to foreign countries where the immigrants are from. How would this event affect the Canadian Balance of Payments?

Question 2.4

Assume that Canada is initially in long run equilibrium. Discuss how each of the following four events would affect aggregate demand, the price level and real GDP of Canada

a.There is a sharp rise in Canada's exchange rate

b.The Canadian Federal Government cut the Corporate Income Tax significantly.

c.There is a recession in China, which is a large importer of Canadian agricultural goods

d.Due to a global health concern, there is a travel restriction of foreign travellers coming to Canada

Question 2.5

Explain the frictional unemployment and give one example.