Econ 1250 Summer 2016 Assignment 5

ECON 1250 SUMMER 2016 ASSIGNMENT 5TOTAL MARKS = 201. A government’s Primary Budget measures the outcome of Government’s Tax Revenue and the Expenditureof Government, G0. Briefly explain what the difference would be between a primary STRUCTURAL deficit anda primary CYCLICAL deficit? (4 Marks)2. Using a graph to illustrate your explanation, explain carefully the outcome on the Canadian dollar if there isan increase of Canadian Exports into the U.S. Market? Would this outcome be considered an APPRECIATIONor DEPRECIATION of the Canadian dollar in relation to the U.S. Dollar? (4 Marks)3. Suppose that a car selling at $65,785.00 CDN in Canada, sells in France for €43,835 Euro. What is the impliedPurchasing Power Parity, PPP exchange rate in terms of the Canadian dollar price of a Euro? If the currentnominal exchange rate is $1.435 for each €, is the Canadian dollar currently over-valued or under-valued?Why do you think this? (4 Marks)4. The Purchasing Power Parity, PPP implied rate of exchange is often different than the nominal “official” rateof exchange. Provide two reasons for such as difference? (4 Marks)5. The Mundell-Fleming model provides an explanation of the effect of fiscal and monetary policy within asmall open economy – such as Canada. Carefully explain the impact of contractionary fiscal policy (areduction in government spending) in Canada where the exchange rate policy is for a Floating or FlexibleExchange Rate Regime? (4 Marks)

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