Explain the logic behind (i.e., discuss how these events affect the real side of the economy).

Q1:
Consider two small open economies, Home and Foreign, and the DC/FC exchange rate is determined by the asset approach to the exchange rate.
a) “When foreign money holders hold a larger portion of their income in the form of money, there will be an overshooting of domestic currency.” True/False/Uncertain, explain with the aid of ONE foreign exchange market diagram.
b) Suppose a country’s financial account depends on the interest rate differentials between DC denominated assets and FC denominated assets. Based on your answer in part (a), explain what happens to Home’s financial account balance in both short run and long run (i.e., a debit or credit entry). Compare your answer to the initial equilibrium and you can assume the financial account is in balanced in the initial equilibrium.
Note:
• Quote the exchange rate as EDC/FC.
• DO NOT write “let Foreign be the home country and its currency be DC” and start your analysis

Q2:
This question is related to the article “Questions on inflation, jobs and housing reveal U.S. concerns on Canadian recovery” from the CBC New, October 8, 2021.
Source: Pittis D. (2021) “Questions on inflation, jobs and housing reveal U.S. concerns on Canadian recovery”, CBC New, October 8. Available at https://www.cbc.ca/news/business/boc-us-concerns-column-don-pittis-1.6203452 (Accessed: December 28, 2021)

Note:
1) Use your own words; DO NOT PLAGIARIZE from the article.
2) Use full sentences (not point forms and abbreviation) to answer this question.
3) Quote the exchange rate as ECAD/USD.

a) The article mentioned that Tiff Macklem, our current Governor of the Bank of Canada, worried about the country’s inflation rate might last longer than expected and the job recovery might be slower than he hoped. Mr. ABC believe Governor Macklem’s views could weaken the Canadian dollar in the short run.
In the context of the asset approach to the exchange rate, explain why Mr ABC’s belief is correct and support your answer by ONE well-labelled diagram for the asset approach to the exchange rate (the one with both domestic money market & foreign exchange market).
b) In the last part of the article, it mentioned the two challenges the Canadian economy encountered are “housing and swings in commodity prices”. Although the financial markets pay close attention to these events, the closing sentence was “What happens in financial markets doesn’t stay in financial markets – it has real impacts, it affects jobs and growth.” Explain the logic behind (i.e., discuss how these events affect the real side of the economy).
c) Some said that the Dutch disease might help to tame inflation in Canada. Explain the logic behind.

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