ECON1202 Initial Monetary Equilibrium a.Beginning from an initial monetary equilibrium, suppose the Bank of Canada increases the money supply.  What happen

ECON1202 Initial Monetary Equilibrium a.Beginning from an initial monetary equilibrium, suppose the Bank of Canada increases the money supply.  What happens in the money market and what happens to desired investment expenditure? Explain in words and with the use of appropriate diagrams. [4 marks] Assignments must be typed, with all calculations shown.
Note: Diagrams should be inserted into the document in their appropriate places.
Question 1.
a. Beginning from an initial monetary equilibrium, suppose the Bank of Canada increases the money
supply. What happens in the money market and what happens to desired investment expenditure?
Explain in words and with the use of appropriate diagrams. [4 marks]
b. Explain how the Bank’s actions in (a) will impact investors’ financial portfolios in terms of Canadian and
foreign bonds. [2 marks]
c. Explain why the outcome in part (b) leads to a change in the value of the Canadian dollar. [2 marks]
Question 2.
a. Assume the Canadian economy has fallen into a recession¸ what type of policy should the Bank of
Canada undertake to return the economy to potential? [1 mark]
b. Clearly explain, with words, the monetary transmission mechanism of the Bank’s action in part (a),
assume an open economy. Which components of AD are impacted by the Bank’s actions, explain?
Use appropriate diagrams to support your answers. [6 marks]
Question 3. Yu arrives in Halifax to pursue an undergraduate degree at St. Mary’s and opens a chequing
account with RBC Bank with the $1,000 cash she brought with her from China.
a. Show this initial transaction on RBC’s balance sheet. [2 marks]
b. Suppose RBC has a target reserve ratio of 1% and it decides to make loans because of the transaction
in (a). By how much has money supply increased because of (a) and (b) combined? [2 marks]
c. Assume all banks in the Canadian banking system have the same target reserve ratio as RBC. After
infinite rounds of deposits and lending, by how much has money supply increased as a result of Yu
opening a chequing account? [2 marks]
d. What would be the possible change in money supply if we also had to consider a cash drain (leakage)
of 4%? [2 marks]
Question 4. What is the core inflation rate and how does it differ from the overall CPI inflation rate? (2 marks)
Question 5.
Money in the Canada today includes which of the following items?
i.
Cash in TD’s cash machines (ATMs).
ii. Canadian dollar bills in your wallet.
iii. Your Visa card.
Briefly explain why or why not. (i – iii worth 2 marks each)
Question 6.
A Weakening Global Expansion – – – IMF World Economic Outlook Update, January 2019
Global growth for 2018 is estimated at 3.7 percent, as in the October 2018 World Economic Outlook
(WEO) forecast, despite weaker performance in some economies, notably Europe and Asia. The global
economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage
point below last October’s projections
Source: https://www.imf.org/en/Publications/WEO/Issues/2019/01/11/weo-update-january-2019
If the IMF forecasts turn out to be correct, what would most likely happen to the output gap and
unemployment in 2019 and 2020? [2 marks]
Assignments must be typed, with all calculations shown.
Note: Diagrams should be inserted into the document in their appropriate places.
Question 1.
a. Beginning from an initial monetary equilibrium, suppose the Bank of Canada increases the money
supply. What happens in the money market and what happens to desired investment expenditure?
Explain in words and with the use of appropriate diagrams. [4 marks]
b. Explain how the Bank’s actions in (a) will impact investors’ financial portfolios in terms of Canadian and
foreign bonds. [2 marks]
c. Explain why the outcome in part (b) leads to a change in the value of the Canadian dollar. [2 marks]
Question 2.
a. Assume the Canadian economy has fallen into a recession¸ what type of policy should the Bank of
Canada undertake to return the economy to potential? [1 mark]
b. Clearly explain, with words, the monetary transmission mechanism of the Bank’s action in part (a),
assume an open economy. Which components of AD are impacted by the Bank’s actions, explain?
Use appropriate diagrams to support your answers. [6 marks]
Question 3. Yu arrives in Halifax to pursue an undergraduate degree at St. Mary’s and opens a chequing
account with RBC Bank with the $1,000 cash she brought with her from China.
a. Show this initial transaction on RBC’s balance sheet. [2 marks]
b. Suppose RBC has a target reserve ratio of 1% and it decides to make loans because of the transaction
in (a). By how much has money supply increased because of (a) and (b) combined? [2 marks]
c. Assume all banks in the Canadian banking system have the same target reserve ratio as RBC. After
infinite rounds of deposits and lending, by how much has money supply increased as a result of Yu
opening a chequing account? [2 marks]
d. What would be the possible change in money supply if we also had to consider a cash drain (leakage)
of 4%? [2 marks]
Question 4. What is the core inflation rate and how does it differ from the overall CPI inflation rate? (2 marks)
Question 5.
Money in the Canada today includes which of the following items?
i.
Cash in TD’s cash machines (ATMs).
ii. Canadian dollar bills in your wallet.
iii. Your Visa card.
Briefly explain why or why not. (i – iii worth 2 marks each)
Question 6.
A Weakening Global Expansion – – – IMF World Economic Outlook Update, January 2019
Global growth for 2018 is estimated at 3.7 percent, as in the October 2018 World Economic Outlook
(WEO) forecast, despite weaker performance in some economies, notably Europe and Asia. The global
economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage
point below last October’s projections
Source: https://www.imf.org/en/Publications/WEO/Issues/2019/01/11/weo-update-january-2019
If the IMF forecasts turn out to be correct, what would most likely happen to the output gap and
unemployment in 2019 and 2020? [2 marks]

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