Question 1

Using appropriate T-accounts, show the impact of the two monetary transactions below [questions 1.a) and 1.c)]on the balance sheets of the Bank of Canada and the ABC chartered bank.

1.a) The Bank of Canada purchases Federal Government bonds worth $1,000 from the ABC chartered bank.

1.b) Would the purchase of bonds by the Bank of Canada in 1.a) increase or decrease the potential for money creation? Explain in less than 5 lines.

1.c) The Bank of Canada transfers $1,000 of Federal Government deposits at the Bank of Canada to the Federal Government account at ABC chartered Bank.

1.d) Would the transfer of Government deposits by the Bank of Canada in 1.c) increase or decreasethe potential for money creation? Explain in less than 5 lines.

Question 2

Assume that in Walada

• Investment expenditures (I) increase by a multiple of 10 dollars for each 1percent point decrease in the country's only rate of interest (i).
• Each dollar of new investment expenditure (I) increases GDP by 4 dollars.
• The money multiplier is equal to 5.
• A change of 5 dollars in the supply of money leads to a 1 percentage point change in the rate of interest (i).

What change (increase or decrease) in the supply of money would you recommend to the Minister of Finance to bridge Walada'scurrent recessionary gap of 300?

Question 3

What is the impact of the following events on the Canadian dollar, other things being equal? Graphs are not required.

3.a) Major international financial institutions believe that Canadian financial markets will be riskier in 2012 than financial institutions in other developed countries.

3.b) U.S. computer firms are expected to purchase fewer Canadian-made hardware and software products in 2012.

3.c) Major international financial institutions expect the rate of economic growth in emerging countries to outpace Canadian economic growth in 2012.

3.d) The Federal Government increases the tariff on imported foreign-made vehicles. 

3.e) The Bank of Canada announces that the risks of a Canadian recession in 2012 far exceed the risks increased inflation.

Question 4

Explain in 5 lines or less (graphs are not required but can be useful) the likely primary or initial impact of the following independent events on the aggregate demand curve (AD), the short-run aggregate supply curve (SAS), and on the long-run aggregate supply curve (LRAS).

Please note that these events would most likely affect only one of AD, SAS and LRAS in the first round. You are not required to account for secondary and other effects as the economy tends to a general equilibrium.

4.a) An increase in Canadian government expenditures (G).

4.b) Canadian labour productivity increases by 2% while wages increase by 3%.

4.c) Canadian exports of wheat and oil increase very significantly. 

4.d) Important discoveries of mineral resources in Canada.