1.Consider the money market. In conducting monetary policy the Bank of Canada arranges the purchase and sale of Government of Canada securities with the chartered banks.

a.Show changes (with a + or - sign) to the assets and liabilities of the Bank of Canada and the Chartered Banks if the Bank of Canada sells $50 million in securities to the chartered banks.

Bank of Canada

Assets

Liabilities and Net Worth

increase

increase

Chartered Banks

Assets

Liabilities and Net Worth

decrease

decrease

b. Briefly explain in words whether this is an example of expansionary or contractionary monetary policy AND how this sale of securities in a) will change the money supply and the equilibrium interest rate.

expansionary monetary policy, Bank of Canada sold securities to sub-banks and got 50million and then more money can be lent out, so the interest rates fall.

c.Briefly explain in words what type of short-run "gap" the sale of securities would be used to eliminate AND what the impact of this monetary policy would be on the equilibrium real GDP and the price level.

d. Assuming this is an open economy with international capitalmobility, briefly explain the second part to the monetary transmission mechanism as a result of the monetary policy described in b) above.

e.Briefly explain the Keynesian and Monetarists debate about the effectiveness of monetary policy as a tool to stimulate growth and the assumptions about the demand for money curve and the investment demand curve held by each.

2.Suppose an economy is Initially in equilibrium at potential GDP, Y*. Then the government decreases the net taxrate (t).

a.Briefly explain in words ( What type of gap would be caused by this policy AND the impacton real GDP and the price level in the short-run.

b.Briefly explain in words how the economy adjusts back to the longrun equilibrium if left alone and no further fiscal or monetary policy is used.

c.In going from the short run equilibrium to thelong-run equilibrium, briefly explain how the composition of real GDP may have changed.

d.Briefly explain what the difference in the growth rate of potential GDP might occur If instead of a decrease in the net taxrate, there was an increase in government purchases

e.Briefly explain what the "Money Neutrality" argument implies about the effectiveness of discretionary fiscal policy and the impact on potential real GDP and price level in the long run.

1. Consider the money market. In conducting monetary policy the Bank of Canada arranges the purchase and sale of Government of Canada securities with the chartered banks. ~ a. Show changes (with a + or - sign) to the assets and liabilities of the Bank of Canada and the Chartered Banks if the Bank of Canada sells $50 million in securities to the chartered banks. Bank of Canada Assets~ Liabilities and Net Worth Chartered Banks Assets( Liabilities and Net Worth b. Briefly explain in words (1-2 sentences and with no diagram) whether this is an example of expansionary or contractionary monetary policy AND how this sale of securities in a) will change the money supply and the equilibrium interest rate. c. Briefly explain in words (1-2 sentences with no diagram) what type of short-run "gap" the sale of securities would be used to eliminate AND what the impact of this monetary policy would be on the equilibrium real GDP and the price level.~d.issuming this is an open economy with international capital mobility, briefly explain (12 sentences with no diagram] the second part to the monetary transmission mechanism as a result of the monetary policy described in b] above.