Sia
Question
Statistics
Posted 7 months ago
Assuming there is no change in the nominal exchange rate, what will be the effect of contractionary monetary policy in Canada on the Canadian price level and the real exchange rate (RER) of the Canadian dollar?
Choose 1 answer:
(A) Price level will increase; RER will increase.
(B) Price level will decrease; RER will decrease.
(c) Price level will decrease; RER will increase.
(D) Price level will increase; RER will decrease.
(E) Price level will decrease; RER will remain unchanged.
Sign in to unlock the answer
Answer from Sia
Posted 7 months ago
Solution by Steps
step 1
To understand the effect of contractionary monetary policy, we need to consider its impact on interest rates and aggregate demand. Contractionary monetary policy typically involves increasing interest rates to reduce inflation
step 2
Higher interest rates tend to decrease aggregate demand, leading to a lower price level. This is because higher interest rates make borrowing more expensive, which can reduce spending and investment
step 3
Assuming the nominal exchange rate remains unchanged, an increase in interest rates can attract foreign investment, leading to an appreciation of the real exchange rate. This is because higher returns on investment make the currency more attractive
step 4
The real exchange rate (RER) is defined as the nominal exchange rate adjusted for differences in price levels between countries. If the Canadian price level decreases and the nominal exchange rate does not change, the RER of the Canadian dollar will increase relative to other currencies
Answer
C
Key Concept
Contractionary monetary policy and its effects on price level and real exchange rate
Explanation
Contractionary monetary policy typically leads to higher interest rates, which reduce aggregate demand and the price level. Assuming the nominal exchange rate is constant, the real exchange rate appreciates due to increased foreign investment attracted by higher interest rates.
Not the question you are looking for? Ask here!
Enter question by text
Enter question by image
Unlock Smarter Learning with AskSia Super!
Join Super, our all-in-one AI solution that can greatly improve your learning efficiency.
30% higher accuracy than GPT-4o
Entire learning journey support
The most student-friendly features
Study Other Question