1a.
(i) If there was no item in the economy widely accepted in return for goods and services, how would transactions be made? How efficient would such a system be?
(ii) What is the difference between a medium of exchange and a store of value?
(iii) What is the difference between commodity money and fiat money?
(iv) Are credit cards money?
(v) Under what circumstance can banks not influence the supply of money?
1b. If Coke sells for $1.20 Canadian and for .75 pounds in the U.K., determine what the exchange rate should be if purchasing power parity holds.
1c. What are the two problems facing the Bank of Canada in trying to control the money supply precisely?
2a. If the chartered banks decide to maintain an average reserve ratio of zero, what would be the size of money multiplier? Explain why.
2b. 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?
2c. (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?
3. Assume that the banking system has no excess reserves. The combined balance sheet of all chartered banks is (in million of dollars)
ASSETS LIABILITIES
Reserves $15,000
Securities and loans $135,000 $150,000 Deposits
$150,000 $150,000
Suppose the general public purchase $500 million in government bonds and pay for them by drawing cheques on their chartered bank deposits.
(i) Calculate the (target) reserve requirement.
(ii) What is the immediate effect on chartered bank reserves and deposits? Provide the balance sheet.
What is the ultimate effect on chartered bank reserves, deposits, and loans? Provide the final balance sheet.
4a. It is often suggested that the Bank of Canada try to reduce the inflation rate to zero. If we assume that velocity is constant, does this zero-inflation goal require that the rate of money growth equal zero? If yes, explain why. If no, explain what the rate of money growth should equal.
4b. Explain whether the following statements are true, false, or uncertain.
(i) “Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest.
(ii) "If prices change in a way that leaves the overall price level unchanged, then no one is made better or worse off."
(iii) "Inflation does not reduce the purchasing power of most workers."
4c. If there was a decline in price over time (deflation), why would this be a concern to workers, consumers, and retailers?
5a. Explain the difference between the real exchange rate and the nominal exchange rate.
5b. If a Japanese car costs 500 000 yen, if a similar Canadian- produced car costs $10,000, and if a dollar can buy 100 yen, what are the nominal and real exchange rates?
5c. Explain the relationship among saving, investment, and net foreign investment.
What is happening to Canada's real exchange rate in each of the following situations? Explain.
(i) The Canadian nominal exchange rate is unchanged, but prices rise faster in Canada than abroad.
(ii) The Canadian nominal exchange rate is unchanged, but prices rise faster abroad than in Canada.
(iii) The Canadian nominal exchange rate declines and prices are unchanged in Canada and abroad.
(iv) The Canadian nominal exchange rate declines and prices rise faster abroad than in Canada.
6a. How would a fall in U.S. interest rates affect Canadian investment, saving, net foreign investment, and the Canadian real exchange rate?
6b. The federal government has made significant efforts to turn the federal deficit into a surplus over the last few years. Explain how this is likely to impact on domestic investment, private saving, the trade balance, and net foreign investment for Canada.