Question

- When chartered banks borrow from the Bank of Canada, the money supply is directly increased by the borrowing. As banks now have excess reserves a further expansion of the money stock is made possible

- As a general rule, a country will gain from international trade if it exports those goods for which it has a relatively low opportunity cost.

- Comparative advantage ensures that Canadian exports of any good will equal Canadian imports of the same good.

Which statements are correct and please explain

Answer 1

- When chartered banks borrow from the Bank of Canada, the money supply is directly increased by the borrowing. As banks now have excess reserves a further expansion of the money stock is made possible.

No. when chartered banks borrow from the Bank of Canada, they do this by paying a certain base interest rate. They will have to lend money at higher costs to customers and this will increase interest rates and money demand will be decreased in the market. Money expansion is possible by decreasing reserve ratio by central bank or printing more currency notes.

- As a general rule, a country will gain from international trade if it exports those goods for which it has a relatively low opportunity cost.

Yes true. A country specializing in good with low opportunity costs gives it a comparative advantage as shown by Ricardo. In this case, if proper terms of trade are decided between two countries then both countries will be able to consume more number of goods than previously possible.

- Comparative advantage ensures that Canadian exports of any good will equal Canadian imports of the same good.

No. It may exceed the Canadian consumption of goods more than previously imported.