Investing in U.S. Securities with CAD

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Questions and Answers

Which term refers to factors indicating the current state of the economy?

Leading indicators

Lagging indicators

Negative interest rates

Coincident indicators (correct)

What economic concept relates to the measure of fluctuations in the Canadian exchange rate?

Nominal gross domestic product

Supply

Business cycle (correct)

Macroeconomics

Which type of inflation is driven by increasing demand for goods and services?

Disinflation

Deflation

Cost-push inflation

Demand-pull inflation (correct)

Which term best describes the situation where workers are seeking jobs but cannot find employment?

Discouraged workers Signup and view all the answers

The measure of the total value of goods produced and services provided in a country during a specific time period is called?

Nominal gross domestic product Signup and view all the answers

What is the term for unemployment that occurs due to fluctuations in the business cycle?

Cyclical unemployment Signup and view all the answers

Which of the following is an example of a leading economic indicator?

Monthly data on housing starts Signup and view all the answers

What economic phenomenon describes a general decrease in prices?

Deflation Signup and view all the answers

What is likely to occur when there is a sustained increase in the general price level?

Inflation Signup and view all the answers

What is one effect of inflation on individuals with fixed incomes?

It can erode their standard of living. Signup and view all the answers

How do borrowers who experience rising incomes during inflation typically fare?

They typically benefit and are less affected by inflation. Signup and view all the answers

Which statement correctly reflects the behavior of lenders during inflationary periods?

Lenders typically raise interest rates to compensate for inflation. Signup and view all the answers

What is one consequence of inflation distorting price signals?

It causes confusion among market participants. Signup and view all the answers

Why might fixed-rate loan investments decrease in value during inflation?

The real value paid back is less due to inflation. Signup and view all the answers

Which group of people is more likely to become significantly affected by inflation?

People on fixed incomes. Signup and view all the answers

What percentage of the working-age population in a society is described as being willing to work in a less productive society?

50% Signup and view all the answers

What was the unemployment rate in Canada in February 2020 before significant changes occurred due to the pandemic?

5.6% Signup and view all the answers

Which of the following statements is true regarding the correlation between GDP and unemployment?

Declining GDP correlates with increased unemployment. Signup and view all the answers

What was the annual unemployment rate in Canada in December 2023?

5.8% Signup and view all the answers

What trend in unemployment rate was observed since the 1960s in Canada?

Upward trend with large fluctuations. Signup and view all the answers

Which of the following best describes the impact of pandemic measures on monthly unemployment rates in Canada in early 2020?

The unemployment rate experienced a sharp rise. Signup and view all the answers

What criticism exists regarding the measurement of unemployment?

Flaws are believed to exist. Signup and view all the answers

How did the annual unemployment rate change during the significant pandemic-related shutdowns?

It spiked significantly before dropping back to previous levels. Signup and view all the answers

What simple conclusion can be drawn about a society where 70% of the working-age population is willing to work?

It is more productive than societies with lower percentages. Signup and view all the answers

What effect does selling Canadian dollars to invest in U.S. dollar-denominated securities have on the Canadian dollar's value?

It decreases the value of the Canadian dollar. Signup and view all the answers

Which action can the Bank of Canada take to counteract the decline in the Canadian dollar's value?

Raise short-term interest rates. Signup and view all the answers

How do higher interest rates generally affect economic growth?

They negatively impact growth prospects. Signup and view all the answers

What is one of the primary responsibilities of the Bank of Canada?

To maintain low and stable inflation. Signup and view all the answers

When inflation expectations are high, what outcome is expected for lenders?

They will charge higher interest rates. Signup and view all the answers

What happens to interest rates when a long-standing commitment to low inflation is perceived as credible?

Interest rates drop to mitigate inflation risk. Signup and view all the answers

What is a potential outcome of lower interest rates in an economy?

Increased economic growth. Signup and view all the answers

How does the foreign exchange market respond to increased supply of a currency, like the Canadian dollar?

The currency decreases in value. Signup and view all the answers

Which institution exercises influence over economic conditions by adjusting interest rates?

Central banks. Signup and view all the answers

What is the main consequence of lenders charging higher interest rates due to anticipated inflation?

Erosion of purchasing power for borrowers. Signup and view all the answers

What is a characteristic of markets in the financial services industry?

They often function through electronic means. Signup and view all the answers

How does the price of a product influence the quantity demanded?

Lower prices generally increase the quantity demanded. Signup and view all the answers

What happens when the market reaches equilibrium?

There is a balance between buyers and sellers. Signup and view all the answers

What determines the equilibrium price of a product?

The interaction between demand and supply. Signup and view all the answers

What does an increase in price typically indicate for producers?

An increased incentive to produce more of the good. Signup and view all the answers

Which statement reflects the law of supply?

Greater quantities are supplied as prices rise. Signup and view all the answers

Why might a market not reach equilibrium?

Unexpected changes in consumer preferences. Signup and view all the answers

How does consumer willingness to pay relate to demand?

It directly impacts the quantity demanded at specific price points. Signup and view all the answers

What does it mean if there is an excess supply in the market?

Prices may need to decrease to stimulate demand. Signup and view all the answers

Which of the following correctly describes the concept of quantity supplied?

It refers to the total amount producers are willing to supply at a specific price. Signup and view all the answers

Study Notes

Balance of Payments and Exchange Rate

Trade between nations is facilitated through the balance of payments, which records all economic transactions between residents and non-residents.
The exchange rate determines the value of one currency in relation to another, impacting international trade costs and investment decisions.

Key Economic Terms

Balance of Payments: Documents a country's international transactions, indicating its economic position globally.
Labour Force: Consists of individuals eligible to work, significantly impacting productivity and economic growth.
Inflation: The general increase in prices, reducing purchasing power, and affecting interest rates set by central banks.

Demand, Supply, and Market Equilibrium

Prices influence buyer behavior; higher prices generally lead to lower demand and vice versa.
Supply is determined by producers; higher prices result in greater supply.
Market equilibrium occurs when demand equals supply, allowing efficient transactions.
Economic productivity increases with higher participation rates of the working-age population.

Unemployment Dynamics

Canadian unemployment rates in 2020 peaked at 13.0% due to pandemic measures but dropped to 5.8% by December 2023.
Unemployment trends are correlated with GDP changes, reflecting economic health and business cycle influences.

Impact of Currency Exchange and Interest Rates

Selling Canadian dollars to buy U.S. securities increases their supply, applying downward pressure on the Canadian dollar's value.
Central banks can intervene by raising interest rates, encouraging the retention of domestic investments despite foreign competition.

Interest Rates and Inflation

Rising inflation causes lenders to charge higher interest rates to maintain purchasing power.
Central banks aim for low and stable inflation; consistent low inflation can lead to reduced interest rates.
Higher interest rates negatively impact economic growth, while lower rates generally foster growth.

Costs of Inflation to the Economy

Inflation reduces the standard of living, especially for fixed-income individuals like retirees.
The real value of investments diminishes during inflation; borrowers may benefit if their income rises with inflation.
Inflation distorts market price signals, complicating economic decision-making.

Economic Indicators and Policy Responsiveness

Central banks influence economic stability through interest rate adjustments based on inflation expectations and market conditions.
Utilizing economic indicators helps assess overall economic health, guiding fiscal and monetary policies.

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Description

This quiz explores the dynamics of currency exchange, specifically how Canadian investors trade their local currency to invest in U.S. dollar-denominated securities. It examines the effects on the foreign exchange market and the potential responses from the Bank of Canada. Test your understanding of these financial concepts.