Question

1.

1. Explain the three key functions of the Bank of Canada
2. In the Canadian banking system, the target reserve ratio is 20 per cent and the estimated value of the cash drain ratio is 5 per cent. What is the total value of new deposits from a new deposit in a bank of $500.00? (show your calculations).

2

1. Explain the three basic functions of money.
2. Briefly explain how the bank of Canada could increase spending in the economy with an increase in the money supply using the reserve ratio requirements.

3

1. What are the two key approaches used in the new economic growth theories to explain why their theories are different from the established Neoclassical Growth theory
2. Explain the fundamental determinants of long-term economic growth for an economy

4 Consider the Canadian economy that is in long-run equilibrium with an output equal to Y*. The United States economy goes into a major slowdown causing a significant decrease in goods and services shipped into the United States from Canada. For Canada, answer the following questions:

1. What kind of shock occurred- aggregate demand or aggregate supply?
2. Explain how fiscal policies by the government of Canada can be used to drive the economy back towards Y* in the long run. Explain the steps

5 A review of the economic performance of the Canadian economy by economists at the Bank of Canada suggests that the economy has an inflationary output gap.

Explain how the Bank of Canada could use monetary policy instruments to close the inflationary output gap. Explain the process (mechanism) through which this occurs. (20 points).

Answer 1

1. (a) The three key functions of the Bank of Canada are:

1. Currency authority: Bank of Canada has the sole authority to issue currency in the Canadian Economy. No other organisation in the country can create currency
2. Banker's Bank and Government's Bank: Central Bank plays the role of bank for government as well as for the commercial or other banks in the economy. Central bank accepts deposits of goverment and banks and provide loan to them as well. Central bank also provide useful suggestions to them.
3. Regulate Money supply: Bank of Canada can raise or reduce the money supply in the economy according to the prevailing situation through various tools like open market operation, bank rate, repo rate and Moral suasion.

(b)  Reserve ratio(r) is 20 per cent and the estimated value of the cash drain ratio(d) is 5 per cent.

so, Change in money in the economy= change in cash held by public+ change in deposit in the bank

change in cash held by public= d* change in deposit in the bank

Change in money in the economy= d* change in deposit in the bank+ change in deposit in the bank

change in money in the economy= change in deposit in the bank(1+ d)

change in money in the economy / (1+d)= change in deposit in the bank

change in cash held by public= d* change in deposit in the bank= d/ (1+d) (change in money in the economy)

New deposits in bank is $500

In the 1st stage: Bank will keep reserve= 500*20%= $100 and further give loan= $400.

In the 2nd stage: New money in the economy = $400

money held by public in cash= d/ (1+d) (change in money in the economy)= 0.05/1.05 ($400)= 19.047

New deposits in bank is $380.953

New reserve keep by bank= 76.1906

new loan by bank= 304.7624

change in money in the economy	(change in money held by public in cash	(change in deposit in the bank	Reserve	Loan
-	-	500	100	400
400	19.047	380.953	76.1906	304.7624

The above will continue until the total amout of reserve keep by bank is equal to the initial deposit in the bank.

total value of new deposits= initial deposit * money multiplier= 500 * (1+d) / (d+r)=500* 1.05/0.25= 2100