1. Explain what happens in a floating exchange rate economy when the world interest rate rises. What might cause such an event? Illustrate the short run and the long run.

2. Explain what happens in a fixed exchange rate economy when the world interest rate rises. Illustrate the short run and the long run.

3. Canada as a country is heavily dependent on the natural resource sector. Explain why this argues in favour of Canada maintaining a floating exchange rate.

4. Realistically, since imports should be based on income as in Ch.10 multipliers, we should modify our open economy sticky price model so that net exports are a function of both the exchange rate and income, instead of just the exchange rate. Explain how this changes the IS∗curve.

5. Canada, the United States, and Mexico are parties to the North American Free Trade Agreement, NAFTA, suggesting some understanding of the benefits of trade. Do you think it would make more sense for Canada or Mexico to peg to the US dollar?

6. A small open economy like Canada is in a recession with a floating exchange rate and zero net exports. Is it possible for fiscal and monetary policy to jointly end the recession and maintain balanced trade? Describe what happens to the components of domestic production in response.