Question

The answer should be not over one single page for each questions and I need a diagram for number two. please draw a diagram as well.

simplify is okay as long as it's correct

please help me.

1 . If the bank of Canada sells some of its holdings of bonds to the chartered banks, the bank will use some of their reserves but in doing so it will add to the money supply <Is this correct or False?) and Explain your answer.

2.Illustrate and Explain how monetary policy can be destabilizing and how a monetary rule could work to reduce the amplitude of the business cycle

Answer 1

1. When the bank of Canada sells some bonds to the chartered banks, the banks give money in order to get the bonds. This leads to a decrease in the money supply in the economy. Thus it is not correct that if the bank of Canada will sell bonds to any bank there will be an increase in the money supply in the economy.

This will have further effects on the internet rate and thereafter many other sectors in the economy.

When the central bank wants to increase the money supply in the economy, it buys bonds from other banks as a result of which there is more money flowing in the economy.

When the central bank sells bonds to other banks, it does it in order to reduce the money supply in the economy.

2. Monetary policy affects the interest rate of the economy directly because of the money supply. This interest rate affects the stock prices, wealth and exchange rate. This further affects the consumption, investment, production, employment and inflation in the economy. The monetary policy can be destabilizing if the central bank changes the money supply often even if not necessary because this change will lead to a change in the interest rate thereby affecting the other sectors in the economy.

Monetary policy can also affect the amplitude of the business cycle by keeping the interest rate in control. If the interest rate is low, it will lead to increase in the spending of the consumers as well as firms thereby boosting the economy. The unemployment level will be low and inflation high. On the other hand, if the interest rate is high there will be reduction in the level of spending leading to higher level of unemployment and low inflation in the economy. In order to reduce the amplitude of the business cycle the central bank will have to keep a tight check on the interest rate.