Short Answer Questions

1. (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?