1. Suppose the bank of Canada wanted to increase the supply of money. How could
ID: 2495972 • Letter: 1
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1. Suppose the bank of Canada wanted to increase the supply of money. How could it use monetary policy achieve the goal? 2.The money demand curve is shown in a graph with interest rate on short term assets on the vertical axis. Why use short-term interest on the vertical axis and not the rate of return on other financial asset? 3 what will happen to the money supply is Jamie withdraws $400 from her chewing account and reserve ratio is 5% 4. Using gold as an example, what is the difference between commodity money and commodity backed money? 5. Suppose the annual inflation rate at 7% and 3% of the labour force is unemployed. If you were on the governing council of the bank of Canada, what action would you prescribe? How would this affect the economy, the inflation rate and the unemployment rate? 1. Suppose the bank of Canada wanted to increase the supply of money. How could it use monetary policy achieve the goal? 2.The money demand curve is shown in a graph with interest rate on short term assets on the vertical axis. Why use short-term interest on the vertical axis and not the rate of return on other financial asset? 3 what will happen to the money supply is Jamie withdraws $400 from her chewing account and reserve ratio is 5% 4. Using gold as an example, what is the difference between commodity money and commodity backed money? 5. Suppose the annual inflation rate at 7% and 3% of the labour force is unemployed. If you were on the governing council of the bank of Canada, what action would you prescribe? How would this affect the economy, the inflation rate and the unemployment rate? 2.The money demand curve is shown in a graph with interest rate on short term assets on the vertical axis. Why use short-term interest on the vertical axis and not the rate of return on other financial asset? 3 what will happen to the money supply is Jamie withdraws $400 from her chewing account and reserve ratio is 5% 4. Using gold as an example, what is the difference between commodity money and commodity backed money? 5. Suppose the annual inflation rate at 7% and 3% of the labour force is unemployed. If you were on the governing council of the bank of Canada, what action would you prescribe? How would this affect the economy, the inflation rate and the unemployment rate?Explanation / Answer
(1) To increase money supply, Bank of Canada will use expansionary monetary policy (which expands the money supply). This can be achieved by one or more of the following monetary policy tools:
(a) Bank of Canada can engage in Open Market Operations (OMO), by purchasing government securities in the open market. This will increase the money supply as people exchange securities for money.
(b) It can decrease the Required Reserve ratio (RR). The RR is the portion of new deposits that every commercial bank has to set aside as required reserves, not available for credit lending. The lower the RR, the higher credit that banks can extend and the higher the new money creation in the economy, therefore money supply increases.
(c) Finally, the central bank can lower the Discount (Bank rate). It is the rate at which Bank of Canada extends loans to commercial banks. The lower the Bank rate, the lower the cost of borrowing for commercial banks and the lower the interest rate on loans that the banks can charge from borrowers, which increases new credit. As credit lending increases, new money supply in the economy increases.
NOTE: First question is answered.
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