1. Bank of Canada expects economy to expand in the future. To prevent inflation from rising, Bank wants to tighten monetary conditions and it raises the operating band from 0.5% - 1% to 0.75% -1.25% a) identify the initial bank rate, deposit rate and target overnight interest rate: b) identify the new bank rate, deposit rate, and the overnight interest rate target: c) If during the course of the day overnight funds are trading below the target overnight rate, manager at the trading desk at BoC enters into (SPRAS or SRAS?) d) Show the effect of the repurchase transaction (as specified by you in c.) on T-accounts of the BoC and Primary Dealer. Assume the transaction is worth $200 million Assets Bank of Canada Liabilities Primary Dealers (LVTS participants) Assets Liabilities e) Assuming no other transaction occurs, what is the effect of the new settlement balances position going to be on the overnight interest rate towards the end of the day? 2) Assume the Settle Balances are in a deficit position at the end of the day. How does the Bank of Canada neutralizes them? Explain with the help of T-accounts below. Assume SB are in deficit of $200 million Assets Bank of Canada Liabilities Primary Dealers (LVTS participants) Assets Liabilities 4. Using the supply and demand analysis of the market for reserves in Canada, indicate what happens to the overnight interest rate, borrowed reserves, and non-borrowed reserves, holding everthing else constant under the following circumstances: 11. Economy is surprisingly strong, leading to an increase in chequable deposits Bank of Canada lowers the target for the overnight interest rate 5. Use the Taylor rule to determine the appropriate setting of the overnight interest rate if the current inflation is 3%, equilibrium overnight interest rate is 2%, target inflation is 2% and there is a positive output gap of 1%