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1.An increase in Canada's exports will always lead to an improvement in our current account. (true/false) 2.If a Canadian purchases shares in Microsoft, this shows up in the Balance of Payments Financial Account as a debit item only. (true/false)
3.Purchasing power parity cannot hold if the law of one price does not hold. (true/false)
4.A real depreciation of the canadian dollar increases aggregate demand for canadian output.(true/false)
5.The difference between the short run and the long run is the prices are less flexible in the long run. (true/false)
6.There is little empirical support for the Purchasing power parity theory because the assumptions behind PPP do not usually hold.(true/false)
7..If a tourist from New York buys a meal in Toronto, paying with a travelers check, this shows up in the balance of payments as a debit item in the current account.(true/false)
8.Under the monetary approach to exchange rates, an increase in either country's national income has no effect on equilibrium exchange rates. (true/false) 9.An increase in world relative demand for Canadian output causes a long -run real depreciation of the canadian dollar against the euro.(true/false)
10.A change in the money supply has no effect on the long run values of the interest rate or real output.(true/false)
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<br>I will address your questions one at a time. In addition to doing so, I will also provide some background information regarding the subject at hand.
<br>1. Current Account: This is the account that records all transactions involving imports and exports of goods and services, plus international unilateral transfer payments.
<br>Question: An increase in Canada's exports will always lead to an improvement in our current account. (true/false)
<br>Answer: "True". To think of this in layman's terms, by exporting a good to a foreign entity, we are gaining income. When income is gained, the current account becomes positive and moves towards a surplus and away from a deficit (ie. if imports exceed exports - just like the current day situation of the USA. They have a record level of a current account deficit because it is so expensive for foreign countries to purchase goods manufactured in the USA).
<br>2. Balance of Payments (definition): A measure of all economic transactions between Canada and other countries in a given year. The balance of payments is in surplus when receipts in the current and capital accounts exceed total payments to foreigners. It is in deficit when such receipts are less than total payments.
<br>Moreover, they are dealings which result in money entering the country are credit (plus) items while transactions which lead to money leaving the country are debit (minus) items.
<br>The balance of payments can be split up into two sections:
<br>the current account which deal with international trade in goods and services;
<br>transactions in assets and liabilities which deals with overseas flows of money from international investments and loans;
<br>The current account consists of international dealings in goods (visible trade) and services (invisible trade).
<br>Invisible trade includes payments for overseas embassies and military bases: interest, profit and dividends from overseas investment; earnings from tourism and transportation
<br>Question: If a Canadian purchases shares in Microsoft, this shows up in the Balance of Payments Financial Account as a debit item only. (true/false)
<br>Answer: What has essentially happened here is that the cash is leaving the country. We are essentially importing a commodity from another country. Think of it in the same way as if you were importing a car from Japan. The answer to this question would then be, "true"
<br>3. Purchasing Power Parity:
<br>Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the ...
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