Suppose the Bank of Canada Fixes the Canada-U

question 71

Multiple Choice

Suppose the Bank of Canada fixes the Canada-U.S.exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar.If the free-market equilibrium exchange rate would otherwise be Cdn$1.25,then the

• A)Bank of Canada needs to engage in expansionary monetary policy to support the dollar.
• B)Government of Canada must reduce spending and increase taxes.
• C)Bank of Canada must sell U.S.dollars.
• D)Bank of Canada must buy U.S.dollars.
• E)Federal Reserve System in the United States is required to increase the number U.S.dollars circulating in Canada.

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Definitions:

Positive

Affirmative, constructive, or based on factual data; often used in reference to positive statements in economics which describe the world as it is, rather than how it should be.

Good Y

A general term used to represent a specific product or commodity in economic models or discussions.

Demand Function

A mathematical representation that describes the relationship between the quantity of a good that consumers are willing and able to purchase at various prices, holding other factors constant.

Income Elasticity

A measure of how much the demand for a product changes in response to a change in consumers' income.