U NIVERSITY OF T ORONTO D EPARTMENT OF E CONOMICS ECO365 I NTERNATIONAL M ONETARY E CONOMICS M ICHAEL H O M ID-TERM T EST DURATION: 90MINUTES M AY31, 2010 IMPORTANT : (i)This test should be answered in BALLPOINT PEN and students who attempt the test in pencil would (iiAnswer ALL questions ONLYin the designated pages. Clearly LABELED the answer to EACH PART of every question. Make sure your HANDWRITING is LEGIBLE. (iiDo NOT SEPARATE any page from this test. 1. At world real interest rate N , Canada has positive net capital outflow. Suppose the Canadian government suddenly runs a huge deficit that results in negative net capital outflow. Use two properly-labeled diagrams to help you explain (a) the setup of the model and (b) the step-by-step analysis on the impacts of this huge government deficit through the loanable funds market and the foreign exchange market according to lecture discussion. (c) What is the relationship between government budget position and the Diagrams: 6 marksalance? Explanation: (a) 8 marks; (b) 8 marks; and (c) 4 marks 2.