ECON 3150 Study Guide - Midterm Guide: South African Rand, South Korean Won, Canadian Airlines
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DEPARTMENT OF ECONOMICS
INTERNATIONAL TRADE I
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
oAppreciation 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
oProfits 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
Significant proportion of total costs in Canadian dollars so appreciation of Canadian dollar
increases costs of Canadian airlines in US dollars
oCanadian 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.
Expectation of depreciation of Yen against other major currencies
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