Questions and Answers of Economics Of Money Banking And Financial Markets

An Italian sports car is selling for 70 000 euros. What is the Canadian dollar price for the Italian car if the exchange rate is 0.60 euros per Canadian dollar? What is the U.S. dollar price for the
In a newspaper, check the exchange rates for the foreign currencies listed in the Financial News box, Foreign Exchange Rates, on page 496. Which of these currencies have appreciated and which have
The current exchange rate between the Canadian dollar and the euro is 0.60 euros per Canadian dollar. If the Canadian dollar is expected to appreciate by 10% relative to the euro, what is the new
If the price level recently fell by 5% in Canada while increasing by 20% in Europe, how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.60 euros per
Get the CANSIM monthly data from 1974 to 2009 on the Canadian-dollar-per-U.S.-dollar exchange rate (series V37426), the Canadian-dollar-per-Britishpound exchange rate (series V37430), the
The governor of the Bank of Canada announces that he will reduce inflation with a new anti-inflation program. If the public believes him, predict what will happen to the Canadian dollar exchange rate.
If Canadians go on a spending spree and buy twice as much French perfume, Japanese TVs, English sweaters, Swiss watches, and Italian wine, what will happen to the value of the Canadian dollar?
If expected inflation drops in Europe so that interest rates fall there, predict what will happen to the exchange rate for the Canadian dollar.
If the European Central Bank decides to contract the money supply in order to fight inflation, what will happen to the value of the Canadian dollar?
The Bank of Canada purchases $1 million of foreign assets for $1 million. Show the effect of this open market operation on the Bank s T-account.
The U.S. Federal Reserve publishes information online that explains the workings of the foreign exchange market. One such publication can be found atwww.newyorkfed.org/education/addpub/usfxm/. Review
The Bank of Canada purchases $1 million of foreign assets by selling $1 million in T-bills. Show the effect of this open market operation on the Banks T-account.
The Bank of Canada sells $1 million of foreign assets for $1 million. Show the effect of this open market operation on the Bank s T-account.
Why does a balance-of-payments deficit for Canada have a different effect on its international reserves than a balance-of-payments deficit for the United States?
If the balance in the current account increases by $1 billion while the capital account is off by $2 billion, what is the impact on governmental international reserves?
Why may the disadvantage of exchange-rate targeting of not having an independent monetary policy be less of an issue for emerging-market countries than for industrialized countries?
Themoney supplyMhas been growing at 10% per year, and nominal GDP PY has been growing at 20% per year. The data are as follows (in billions of dollars):Calculate the velocity in each year. At what
Considering that both Fisher and the classical economists ended with the same equation for the demand for money, Md + k * PY, their theories are equivalent. Is this statement true, false, or
Suppose that the demand for money is given bywhere M is nominal balances, P the price level, i the nominal interest rate, and Y is real income. a and b are parameters.a. Explain how a constant rate
Explain how the velocity of money is affected by changes in the nominal interest rate, i, and real GDP, Y.
In Tobin's analysis of the speculative demand for money, people will hold both money and bonds, even if bonds are expected to earn a positive return. Is this statement true, false, or uncertain?
Suppose that the demand for money is given bywhere M is nominal balances, P the price level, i the nominal interest rate, and Y is real income. a and b are parameters. For given values of i and Y,
Calculate the value of the consumption function at each level of disposable income in Table 22-1Table 22-1 if a 100 and mpc = 0.9.
Get the quarterly data from 1962 to 2009 on real GDP (CANSIM series 41707150), the GDP deflator (series V1997756), the monetary base (series V37145), and the three-month T-Bill rate (series V122531)
If the marginal propensity to consume were 0.5, how much would government spending have to rise in order to raise output by $1000 billion?
Go to www.fgn.unisg.ch/eurmacro/Tutor/ keynesiancross.html. Make sure the following settings are used: t = 0, G = 200; c = 0.8, and m = 0.0. Click on the memorize button. Note the value of
Go to www.fgn.unisg.ch/eurmacro/Tutor/ keynesiancrss.html. Make sure the following settings are used: t = 0.25, G = 400; c = 0.8, and m = 0.0. Click on the memorize button. Note the value of
If the consumption function is C = 100 + 0.8Y and planned investment spending is 200, what is the equilibrium level of output? If planned investment falls by 100, how much does the equilibrium level
Using a supply and demand diagram for the market for money, show what happens to the equilibrium level of the interest rate as aggregate output falls.What does this imply about the slope of the LM
Consider a closed economy (NX = 0) and assume the following functionswhere I is autonomous investment expenditure; ir is the real interest rate, b > 0; TR denotes transfers, which are assumed to
A rise in planned investment spending by $100 billion at the same time that autonomous consumer expenditure falls by $50 billion has the same effect on aggregate output as a rise in autonomous
Consider the following money demand function (in real terms)where k is the income elasticity and h is the (nominal) interest rate elasticity of real money balances. Assume that k > 0 and that h
If the consumption function is C = 100 - 0.75Y, I = 200, and government spending is 200, what will be the equilibrium level of output? Demonstrate your answer with a Keynesian cross diagram. What
Assume that the price level is fixed (so that i = ir) and consider the following ISLM modelA is autonomous expenditure, b is the interest elasticity of investment expenditure, k is the income
An excellent way to learn about how changes in various factors affect the IS and LM curves is to visit www.fgn.unisg.ch/eurmacro/tutor/islm.html. This site, sponsored by the World Bank, allows you to
Continuing from the above problem,a. What is the autonomous expenditure multiplier for this ISLM model?b. What is the money multiplier?
What happens to the position of the LM curve if the Bank of Canada decides that it will decrease the money supply to fight inflation and if, at the same time, the demand for money falls?
An excess demand for money resulting from a rise in the demand for money can be eliminated only by a rise in the interest rate. Is this statement true, false, or uncertain? Explain your answer.
Suppose that the Bank of Canada wants to keep interest rates from rising when the government sharply increases military spending. How can the Bank do this?
As the price level rises, the equilibrium level of output determined in the ISLM model also rises. Is this statement true, false, or uncertain? Explain your answer.
An equal rise in government spending and taxes will have what effect on the position of the aggregate demand curve?
Consider the following ISLM model.A is autonomous expenditure, b is the interest elasticity of investment expenditure, k is the income elasticity of money demand, h is the interest elasticity of
Predict what will happen to interest rates and aggregate output when there is an autonomous export boom.
As this book goes to press, the Canadian economy was in a recession with an increasing unemployment rate. Go to www.bankofcanada.ca and follow the link to employment statistics. What has happened to
A is autonomous expenditure, b is the interest elasticity of investment expenditure, k is the income elasticity of money demand, h is the interest elasticity of money demand, t is the tax rate, and
Suppose that government spending is raised at the same time that the money supply is lowered. What will happen to the position of the aggregate demand curve?
Predict what will happen to aggregate output and the price level if the Bank of Canada increases the money supply at the same time that the government implements an income tax cut.
Predict the effect of an increase in the goods and services tax (GST) on both the aggregate supply and demand curves and on aggregate output and the price level.
When there is a decline in the value of the dollar, some experts expect this to lead to a dramatic improvement in the ability of Canadian firms to compete abroad. Predict what would happen to output
Figure 25-1 on page 644 shows the relationship between estimated real rates and nominal rates forthe United States. Go to www.martincapital.com and click on charts and data and then o nominal
Figure 25-2 on page 647 discusses business cycles. While peaks and troughs of economic activity are a normal part of the business cycle, recessions are not. They represent a failure of economic
The cost of financing investment is related only to interest rates; therefore, the only way that monetary policy can affect investment spending is through its effects on interest rates. Is this
Why are discretionary policies to eliminate unemployment more likely to lead to inflation than nondiscretionary policies?
If the economy s self-correcting mechanism works slowly, should the government necessarily pursue discretionary policy to eliminate unemployment?
To prevent inflation, the Bank of Canada should follow Teddy Roosevelt s advice: Speak softly and carry a big stick. What would the Bank s big stick be? What is the statement trying to say?
Figure 26-8 on page 682 reports the inflation rate from 1960 to 2008. As this chapter states, inflation continues to be a major factor in economic policy. Get the monthly data from 1960 to 2009 on
If, in a surprise victory, a new government is elected to office that the public believes will pursue infla-tionary policy, predict what might happen to the level of output and inflation even before
The failure of the Bank of Canada to control the money supply in the 1970s and 1980s suggests that the Bank is not able to control the money supply. Do you agree or disagree? Explain your answer
What are the most important advantages and disadvantages of nominal GDP targeting over inflation targeting?
What is the big if necessary for the success of monetary targeting? Does the experience with monetary targeting suggest that the big if is a problem?
Classify each of the following as either a policy instrument or an intermediate target, and explain why.a. The three-month treasury bill rateb. The monetary basec. M2*
It can be interesting to compare the purchasing power of the dollar over different periods in history. Go to www.bankofcanada.ca/en/rates.htmand scroll down to the link to the inflation calculator to
Explain how repos and reverse repos affect the overnight rate.
Get the daily CANSIM data from January 2, 1996, to November 11, 2009, for the bank rate (series V39078) and the target overnight rate (series V39079) from the Textbook Resources area of the
If a bank sells $10 million of bonds back to the Bank of Canada in order to pay back $10 million on the advances it owes, what will be the effect on the level of chequable deposits?
If a bank decides that it wants to hold $1 million of excess reserves, what effect will this have on chequable deposits in the banking system?
If the desired reserve ratio on chequable deposits increases to 20%, how much multiple deposit creation will take place when reserves are increased by $100?
If the Bank of Canada lends five banks an additional total of $100 million but depositors withdraw $50 million and hold it as currency, what happens to reserves and the monetary base? Use T-accounts
If the Bank of Canada sells $2 million of bonds to Irving the Investor, who pays for the bonds with a briefcase filled with currency, what happens to reserves and the monetary base? Use T-accounts to
If the Bank of Canada sells $2 million of bonds to the First Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
The independence of the Bank of Canada has meant that it takes the long view and not the short view. Is this statement true, false, or uncertain Explain your answer.
We have discussed various stock markets in detail throughout this text. Another market that is less well known is the TSX Venture Exchange. Here contracts on a wide variety of commodities are traded
Visit the Montreal Exchange's website (as above). Under Trading Tools, click on the ONX Simulator. Use the simulator to compute the probability of an upcoming Bank of Canada rate move as reflected in
Visit the Montreal Exchanges website at www.m-x.ca. Under Trading Tools, click on the Options Calculator. Use the calculator to price an American equity option maturing in 60 days with a strike price
WestBank just started operations with $6 million in capital. On the first day of operations, it received $100 million in chequable deposits and issued$25 million non-mortgage loans and another $25
The commercial banking industry in Canada is less competitive than the commercial banking industry in the United States because in Canada only a few large banks dominate the industry, while in the
Should the overlap between the OSFI and CDIC be eliminated? Why or why not?
How did a decline in housing prices help trigger the subprime financial crisis of 2007 - 2008?
If I read in the Globe and Mail: Report on Business that the smart money on Bay Street expects stock prices to fall, should I follow that lead and sell all my stocks?
Visit www.forecasts.org/data/index.htm. Click on Stock Index Data at the very top of the page. Now choose International Stock Indices-Monthly. Review the indices for the Nikkei 225, DAX, Hang Seng,
Predict what would happen to yield spreads in response to the following macroeconomic events: recession, high inflation, and stock market increase.
There are a number of indexes that track the performance of the U.S. stock market. It is interesting to review how they track along each other. Go to www.bloomberg.com. Click on the Charts tab at the
What are the advantages and disadvantages of the CDIC s risk-based insurance premiums?
What steps were taken in recent CDIC legislation to improve the functioning of deposit insurance?
The Differential Premiums By-law, introduced in 1999, is designed to increase the incentives for Canadian banks to hold more capital. Describe its major features.
Why did Canada s bank crisis not occur until the 1980s?
What financial regulations are designed to reduce moral hazard problems created by deposit insurance? Will they completely eliminate the moral hazard problem?
What happens to the market value of the bank's liabilities if the interest rate falls by 2 percentage points?
What happens to the market value of the banks assets if the interest rate increases by 2 percentage points?
If the First bank decides to convert $5 million of its fixed-rate assets into rate-sensitive assets, what will happen to its interest-rate risk? Explain using gap analysis.
The CDIC is extremely concerned with risk management in banks. High-risk banks are more likely to fail and cost the CDIC money. The CDIC regularly examines banks and rates them using a systemcalled
Go to www.finance.yahoo.com and download daily data on the Dow Jones Industrial Average (DJIA) since 1928.a. Sort the series from oldest to newest, present a time series plot of the Dow Jones
What are the financial implications of a firm with a high default risk?
Get the monthly data from 1978 to 2006 on longterm Canada bonds (CANSIM series V122544), the interest rate on long-term provincial bonds (series V122517), and the interest rate on long-term corporate
Get the monthly data from 1978 to 2006 on the three month T-bill rate (CANSIM series V122531), the interest rate on long-term corporate bonds (series V122518), and the interest rate on long-term
Suppose that you are forecasting one-year T-bill rates as followsYou have a liquidity premium of 0.25% for the next year and 0.50% thereafter. Would you be willing to purchase a four-year Canada bond
Which should have the higher risk premium on its interest rates, a corporate bond with an S&P BBB rating or a corporate bond with a C rating? Why?
The governor of the Bank of Canada announces that interest rates will rise sharply next year, and the market believes him. What will happen to today s interest rate on long-term corporate bonds?
Get the monthly data from 1976 to 2009 on the three month T-bill rate (CANSIM series V122531) from the Textbook Resources area of the MyEconLab.a. Plot the nominal interest rate, it.b. Calculate the
What effect will a sharp increase in personal savings rates have on Canadian interest rates?

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