Answer any two of the following three questions.

1. Explain what happens when an economy experiences expansionary monetary policy.Be sure to discuss what happens to AD, real GDP, interest rates, the price level, the value of the Canadian dollar, and the real exchange rate.

2.Suppose the main goal of the Bank of Canada is to reduce inflation in the Canadian economy. Identify what type of monetary policy the Bank of Canada should implementand explain 2 different policy tools the Bank of Canada could use and discuss how the Bank would go about reducing inflation.Once the Bank of Canada has manipulated the policy tools, what will be the impact on the money supply, interest rates, investment spending, consumption and real GDP.

3.Assume that the Canadian government is currently following a flexible (floating) exchange rate policy.For each of the following three events below:

1. State whether the event below will result in an increase or decrease in the demand or supply for Canadian dollars.
2. State whether the event below will cause the Canadian exchange rate to appreciate or depreciate.

Event 1:This year, a record number of retired Canadians spend their winters in the U.S.

Event 2:Large U.S. retailers have just purchased 100% of the shares of some major Canadian department stores.

Event 3:Due to lower interest rates, foreign investors significantly reduce their purchases of Canadiangovernment bonds.