Question

We live in an open economy with international capital mobility If Bank of Canada increases the...

We live in an open economy with international capital mobility

  1. If Bank of Canada increases the money supply would that make Canadian bonds attractive to foreigners or not? Explain.

  1. Increasing the money supply would lead to the appreciation of the Canadian dollar. True or false? Explain

  1. Based on your answer to “b” above, what will happen to net exports?  Explain

  1. Ignoring what Bank of Canada did, assume that the Federal Reserve (the US Central Bank) increases the US money supply what is the likely effect on Canada? Explain.

Homework Answers

Answer #1

a) If bank of Canada increases money supply then that would decrease the interest rate for bonds. Decrease in the intereste rate implies decrease in the gains from bond and that cannot not make Canadian bonds more attractive , instead it would make it lesser attractive.

b) False.

Since increase in money supply will make Canadian bonds unattractive, foreigners will decrease their demand for Canadian currency which they needed otherwise to buy Canadian bonds, instead they may pull out there investment from Canadian market leading to decrease in demand for Canadian currency and hence fall in its relative value thats is depreciation of Canadian currency.

c)When Canadian Currency depreciates the value of its exports abroad decreses, it sells cheaper in foreign market due to which exports rises. Similarly, price of imports increases as depreciation of domestic currency leads to increase in the relative value of foreign currency and hence import falls . Net export = Export - Import . Since Exports increases, imports falls, net export increases due depreciation of Canadian currency.

d) If Federal Reserve increases money supply then interest rate of bonds and stocks in US market falls, foreigners to US, which includes Canadians, may stop injecting money or rather they may withdraw money from US market, which would ultimately decrease the demand of US currency and lead to depreciation of US currency. Meanwhile, it may happen that the investments withdrawn from US is invested in Canada, if Canadian interest rate for bond remains above that of US after increase in money supply by Federal Reserve which would consequently means increase in demand for Canadian currency and hence its appreciation . Depreciation of US currency implies appreciation of Canadian currency, since appreciation/ depreciation is a relative term. This could increase the import in Canada and decrease export from Canada.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
We live in an open economy with international capital mobility If Bank of Canada increases the...
We live in an open economy with international capital mobility If Bank of Canada increases the money supply would that make Canadian bonds attractive to foreigners or not? Explain. Increasing the money supply would lead to the appreciation of the Canadian dollar. True or false? Explain Based on your answer to “b” above, what will happen to net exports? Explain Ignoring what Bank of Canada did, assume that the Federal Reserve (the US Central Bank) increases the US money supply...
PROBLEM 5:   MONETARY POLICY If the central bank of Canada institutes a contractionary monetary policy, describe...
PROBLEM 5:   MONETARY POLICY If the central bank of Canada institutes a contractionary monetary policy, describe what will happen to the following variables relative to what would happen without the policy: The money supply Interest rates Investment Consumption Net Exports The aggregate demand curve Real GDP The price level The value of the Canadian dollar The long run aggregate supply curve PROBLEM 5:   MONETARY POLICY If the central bank of Canada institutes a contractionary monetary policy, describe what will happen...
Consider the case of a gold standard economy with no capital mobility. In the absence of...
Consider the case of a gold standard economy with no capital mobility. In the absence of international capital mobility, is a trade deficit sustainable? How would central bank reserves change if the country ran a trade deficit? What would be the effects on the money supply? How would output and employment change, and what would be the effects on the trade balance? Ref book international Macroeconomic by Montiel
3.Canada is a small open economy, and our (by far) largest trading partner is the United...
3.Canada is a small open economy, and our (by far) largest trading partner is the United States. Imagine that the US economy enters a significant recession due to COVID-19, but the Canadians do not get sick at all and everything works as usual in the Canadian economy. How would the US recession show in the Canadian economy? Use the IS-LM-FE model to explain what would happen to the Canadian real GDP and real interest rate and why. Discuss the effects...
Consider a small, open economy with perfect capital mobility and a fixed exchange rate regime, whose...
Consider a small, open economy with perfect capital mobility and a fixed exchange rate regime, whose domestic interest rate is currently the same as the foreign interest rate. Suppose that it adopted the USD as its official currency. a. Draw the IS-LM diagram for this nation at its general equilibrium point E1, with equilibrium income level Y1 and domestic interest rate r1, what happened if central bank of this country expanded its money supply, please show the changes in the...
If the head of the central bank wants to expand the supply of money, which of...
If the head of the central bank wants to expand the supply of money, which of the following would do it? Explain how the policy impacts the money supply, and find the policies that might increase the money supply. 1. Increase the required reserve ratio 2. Decrease the required reserve ration 3. Increase the discount rate 4. Decrease the discount rate 5. Buy government securities in the open market 6. Sell government securities in the open market 7. (Review for...
Suppose the Indian central bank (RBI) increases its target overnight interest rate. In doing so it...
Suppose the Indian central bank (RBI) increases its target overnight interest rate. In doing so it is clearly trying to increase interest rates in the money market (and throughout the economy). (a) Explain why the central bank must be willing to decrease the money supply to support higher rates in the money market. [Hint: Include a diagram of the money market in your answer (b) The central bank can change the money supply through an open market operation. In this...
A6-10. Suppose the Indian central bank (RBI) increases its target overnight interest rate. In doing so...
A6-10. Suppose the Indian central bank (RBI) increases its target overnight interest rate. In doing so it is clearly trying to increase interest rates in the money market (and throughout the economy). (a) Explain why the central bank must be willing to decrease the money supply to support higher rates in the money market. [Hint: Include a diagram of the money market in your answer.] [6] (b) The central bank can change the money supply through an open market operation....
Chapter 11, 12: Money and Inflation I. If the head of the central bank wants to...
Chapter 11, 12: Money and Inflation I. If the head of the central bank wants to expand the supply of money, which of the following would do it? Explain how the policy impacts the money supply, and find the policies that might increase the money supply. 1. Increase the required reserve ratio 2. Decrease the required reserve ration 3. Increase the discount rate 4. Decrease the discount rate 5. Buy government securities in the open market 6. Sell government securities...
Home is a small open economy with perfect (financial) capital mobility. Initially, it is in its...
Home is a small open economy with perfect (financial) capital mobility. Initially, it is in its long-run equilibrium and domestic assets and foreign assets are prefect substitutes. Recently, the United States reformed its tax system and lowered taxes. Many believe that this kind of development might have negative impacts on the Home economy and people worry that the negative impacts include the following: Change the world interest rate (Hint: you need to figure out what happens to the world interest...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT