International Finance Question

You do not have to write graphs or equations. But you need to write clearly when you answer the questions. You may have a graphs or equations in your mind and explain them in plain English.

If we assume that purchasing power parity (PPP) holds, how is nominal exchange rate between Canadian dollar and Euro determined under monetary approach to exchange rate? How can you extend this approach by incorporating real exchange rate? How is nominal exchange rate determined now?

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Starting from an equilibrium, what happens to Canadian dollar real exchange rate with the Euro if Canada becomes more productive than the EU? Other things remaining the same, how does this change affect Canada’s current account and net foreign wealth?


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