One year ago, the Canadian Dollar (CAD) was quoted at Australian Dollar (AUD) 0.79800. Today, the CAD is trading at AUD 0.82400. Assume that Canada and Australia are trading partners. Which of the following statements is most accurate? Over the past year, the Canadian: A) real interest rate decreased (relative to Australia’s real interest rate). B) economy grew at a faster rate than the Australian economy. C) government recently undertook an unanticipated expansionary fiscal policy action. D) government undertook an unanticipated expansionary monetary policy action.
I would say C because the CAD has appreciated in value. The currency appreciated in value because of a rise in the interest rates, due to a unanticipated expansionary fiscal policy. Somebody help me here. Does the unanticipated expansionary policy cause a rise in interest rates?
for me a, c, d would lead to a depreciation of the currency
I would also go w/ B Do you have the right answer?
Correct answer is: Your answer: C was correct! From the given exchange rates, we determine that the Canadian Dollar has appreciated against the Australian Dollar (the CAD now buys more units of AUD). An unanticipated shift to a more expansionary fiscal policy will, in the short run, lead to appreciation. The increased aggregate demand results in higher economic growth and higher inflation. These two factors normally result in currency depreciation. However, the third impact of the policy, increased budget deficits and government borrowing, increases real interest rates, resulting in currency appreciation. This last effect dominates in the short run. The other statements are false. An unanticipated shift to expansionary monetary policy would lead to currency depreciation. The expansionary policy leads to higher economic growth, an accelerated inflation rate, and lower real interest rates. All these factors cause a nation’s currency to depreciate. Domestic products are more expensive, foreign investment is discouraged, and exports decline.
D?? An unanticipated expansionary monetary policy would cause an increase in CAD currency