1.

While the US economy has suffered significantly, it is no longer expected to

perform badly and will settle at its present level for some time. US policies are
also not going to change in the near future. Many other important variables like
budget deficit, inflation and growth rate would more or less be expected to remain
the same as current levels.

The US yield curve is downward sloping. Dollar is expected to weaken and this
expectation has already been factored into various economic variables.
The Canadian economy is doing well and the inflation rate is expected to decline
there. The Canadian dollar is expected to strengthen against US dollars. Yield
curve in Canada is upward sloping.
Canadian monetary policies are not expected to be affected. Other economic
variables are also going to be more or less stable in Canada.
=> Based on the information provided, the US interest rate is expected to be lower
in future.
• This is evidenced by a downward sloping yield curve which implies that
interest rate at longer maturity is lower than interest rate at shorter maturity.
This is also expected from a weak dollar.
• Weak dollar and low interest rate would force investors to seek better returns in
Canada. This would increase liquidity in the US market and put downward
pressure on interest rates. Low liquidity premium in the US also reflects this
fact.
Hence US interest rates are expected to decline. The fact that the economy would
remain more or less where it is would also support the declining interest rate.