Question 1: Consider the following hypothetical prices of foreign currencies vis-a-vis the Canadian dollar:

Currency$1995 price$2001 price

Euro$1.37$1.67

U.S. dollar$1.54$1.67

Japanese Yen$161.54$170.83

Australian dollar$1.2$1.15

Suppose Canada trades only with these four countries, and the volume of trade is equally spread across the countries.  Calculate the overall nominal exchange-rate index for 2001 that corresponds with these figures, using 1995 as a base year

Question 2: Assume that a reduction in G led to the federal government budget surplus. How will this affect: the interest rate, exchange rate, imports and exports? 

Question 3: Consider a modification of the planned expenditures model in which government transfer payments are included in the model.  Suppose these payments are determined independently of income: they are exogenous and fixed.  These represent payments by the government that augment the disposable income of individuals; the relevant expression for disposable income thus becomes

                                 Y^D = TR + (1 - t)  Y.

Incorporate this modified definition of Y^D into the consumption function, and use the resulting consumption function to derive the planned expenditures function (E as a function of Y) in this case.

Question 4: Suppose the Canadian government undertakes a large infrastructure development project that they decide to finance by borrowing (issuing bonds).  Suppose this causes a large increase in real long-term interest rates in Canada.  Use the IS model to characterize the economic implications of this undertaking in the U.S., holding U.S. interest rates and all other exogenous variables fixed.

Question 5: Compare the impact of a tax cut under two versions of the IS-LM model: the version under which the central bank maintains an interest-rate target, and the version under which the central bank maintains a monetary target.  What accounts for the differing impacts on Y? Use the IS-LM graph to show your results.

Question 6: In the context of the IS-LM model, suppose the government's budget is initially balanced, and exports exactly equal imports.  Characterize the impact on the trade balance of a surge in government expenditures Gthat results in a government budget deficit.