. In the first week of March 2020, both the Federal Reserve (the Fed) and the...

. In the first week of March 2020, both the Federal Reserve (the Fed) and the Bank of Canada (BOC) decreased their policy interest rates by 0.5 percentage points. Clearly, both are trying to decrease interest rates in the money market (and throughout the economy).

(a) Should the BOC engineer an increase or a decrease the money supply to support its efforts to achieve lower interest rates in the money market? [Hint: Include a diagram of the money market with your answer.] [6]

(b) Should the BOC buy bonds from, or sell bonds to, the banking system to effect this change? Briefly describe how such a transaction changes the amount of deposit money in the system. If the necessary change in the money supply is 100B $C and the banking system has a desired reserve ratio of 5%, what should be the size of the open market operation? [6]

(c) What impact should this policy change have on investment and ultimately aggregate expenditure? [Hint: Include diagrams showing these effects.] [4]

(d) Canada is an open economy (including being open to capital flows). Can you think of any other effect that might influence aggregate expenditures? [4]

(e) What is overall effect on aggregate demand in Canada? [2]

Expert Solution

Rahul Sunny answered 1 year ago

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