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EC3150C Test 1.doc

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ECON 3150
Fred Lazar

YORK UNIVERSITY DEPARTMENT OF ECONOMICS ECONOMICS 3150C INTERNATIONAL TRADE I Test #1 October 7, 2010 ANSWER ANY THREE OF THE FOLLOWING QUESTIONS. 1. In 2003, Jeffrey Rubin predicted that if the Canadian dollar appreciated to US$0.75, Canada would slip into a recession. The Canadian dollar appreciated well above this level over the next few years, and the Canadian economy continued to grow. Why was Rubin wrong?  Aggregated demand depends on more than just exchange rate  Canadian economy growing at time of prediction  Negative impacts on exports and aggregate demand would have to be large enough to offset growth of economy o Appreciation likely reduced rate of growth of Canadian economy but not sufficiently to push Canada into recession  US economy growing – positive spillover effect into Canada  Resource boom – resources priced in US dollars so no negative impact because of appreciation o Profits in Canadian dollars for Canadian producers lower because of appreciation but offset by higher prices for resources  Canadian dollar may not have appreciated against other currencies 2. Oil is traded and priced in US dollars. How does this affect the competitiveness of Canadian airlines compared to their US counterparts when the Canadian dollar appreciates against the US dollar, as has been the case during the past year?  Canadian airlines costs in Canadian dollars declined – possibly higher profits on domestic routes  Significant proportion of total costs in Canadian dollars so appreciation of Canadian dollar increases costs of Canadian airlines in US dollars o Canadian airlines less cost competitive against US airlines in Canada-US markets  If Canadian airlines fully hedged against foreign currency exposure, appreciation of Canadian dollar would not lead to lower Canadian dollar costs for fuel – so Canadian airlines even less cost competitive 3. The Bank of Japan has just reduced short-term interest rates to 0%. Following this move by the Bank of Japan, the Japanese stock market rallied – equity prices increased sharply. Why?  Expectation of depreciation of Yen against other major currencies 1 o Positive for export-oriented companies – expected increase in revenues and profits o Expected higher equity prices  Expected stimulus for aggregate demand in Japan beyond export impacts o Expected increase in revenues and profits for all Japanese companies
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