a. If the chartered banks decide to maintain an average reserve ratio of zero, what would be the size of money multiplier? Explain why.
b. Suppose that the Bank of Canada sells 100 million pounds sterling from its foreign exchange reserves, and that the exchange rate is $2.40 Canadian per pound sterling.
(i) Explain what happens to the Canadian money supply.
(ii) Now suppose that the Bank of Canada does not want the money supply to change. What would it need to do to sterilize its foreign exchange market operation?
c.(i) Paper currency is the most easily recognized form of money. How well does paper currency serve the functions of money if we have an inflation rate of
50-percent per year?
(ii) Gold is also recognized as a form of money. How well does gold serve the functions of money if we have an inflation rate of 50-percent?