RVHS_H1_ECONS_CSQ2

2015 RVHS Y6 H1 Prelim II Suggested Answers for CSQ2 (a) (i) Identify the trend of the value of the Canadian Dollar against the US Dollar between January 2013 and December 2013. The Canadian Dollar depreciated [1] against the USD from January 2013 to December 2013. [1] (ii) Explain the impact of the above trend on Canada’s balance of trade with the rest of the world. Balance of trade account records the imports and exports of physical goods like raw materials, food and manufactured goods. With the weakening of Canadian Dollar against the USD, Canada’s exports to the world will be cheaper in terms of USD and imports from the world will be more expensive in Canadian Dollar . Assuming Marshall Lerner condition (PEDx + PEDm >1) is satisfied, Canada’s ne t exports to the world will increase, leading to an improvement in her balance of trade account with the rest of the world. [2] (b) With reference to Extracts 1 and 2, explain how high household debt and continued moderation of the housing sector may sl ow down Canada’s economic growth.  Continued moderation of the housing sector (Extract 2) signifies a slowdown in residential investment (I)  It also raises “fears of a US -style crash”, where housing prices drop significantly (Extract 1). The expectation of a drop in wealth (asset price) will slow down consumer spending (C)  High household debt also makes consumers less willing to spend (Extract 1). This further slows down consumption (C)  Taken together, the slowdowns in C & I will dampen the increase in AD, hence slowing down the increase in national income (economic growth) [4] (c) With reference to Extract 1, comment on whether Canada could rely on her energy sector and the U.S. economy to improve her economic performance. Yes, Canada could rely on her energy sector and the US economy  A strong energy sector will boost Canada’s export (X)  As the US economy recovers, US national income increases, enabling it to import more from Canada. This will boost Canada’s export (X)  The rise in X will raise Canada’s AD, improving her national income and consequently employment. The rise in X also improves C anada’s Balance of Payments. No, Canada cannot rely on her energy sector and the US economy  Competition from cheaper US oil will mean lower DD for Cana dian energy. This could dampen Canada’s X. This may also discourage I due to weakened DD condition (Extract 1: Suncor Energy scrapped plans for a multibillion - dollar upgrading investment)  The possibility of US fiscal tightening means US govt may cut govt spending [5]

and raise tax. This will have a contractionary effect on the US economy, making a US recovery less certain and hence reducing Canada’s prospects of exporting more to the US (d) Extract 4 suggests that Cisco’s investment into Canada will be beneficial to Canada’s economy. Using AD/AS analysis, explain how foreign direct investmen