1. A government's Primary Budget measures the outcome of Government's Tax Revenue and the Expenditure of Government, G0. Briefly explain what the difference would be between a primary STRUCTURAL deficit and a primary CYCLICAL deficit?
2. Using a graph to illustrate your explanation, explain carefully the outcome on the Canadian dollar if there is an increase of Canadian Exports into the U.S. Market? Would this outcome be considered an APPRECIATION or DEPRECIATION of the Canadian dollar in relation to the U.S. Dollar?
3. Suppose that a car selling at $65,785.00 CDN in Canada, sells in France for €43,835 Euro. What is the implied Purchasing Power Parity, PPP exchange rate in terms of the Canadian dollar price of a Euro? If the current nominal exchange rate is $1.435 for each €, is the Canadian dollar currently over-valued or under-valued? Why do you think this?
4. The Purchasing Power Parity, PPP implied rate of exchange is often different than the nominal "official" rate of exchange. Provide two reasons for such as difference?
5. The Mundell-Fleming model provides an explanation of the effect of fiscal and monetary policy within a small open economy - such as Canada. Carefully explain the impact of contractionary fiscal policy (a reduction in government spending) in Canada where the exchange rate policy is for a Floating or Flexible Exchange Rate Regime?