Problem 1 How Will the Rise in Interest Rate Affect Us? (this was in year 2018-2019) The Bank of Canada has hiked the interest rate for the first time in seven years. The increase will provide greater inventive for Canadians to save more, lead to a rise in mortgage rates, and increase the cost of borrowing to invest. Source: The Huffington Post, July 18, 2017 a) Explain the effects of the Bank of Canada's interest rate rise on household saving and consumption and business investment. Draw a graph to illustrate your explanation. b) Explain the effects of the changes in household saving and consumption and business investment on aggregate demand. Would you expect a multiplier effect? Why or why not? c) How would the predicted rise in mortgage rates change aggregate demand? Problem 2 From 2010 to 2017, the long-term real interest rate paid by the safest corporations decreased from 3 percent to less than 1 percent. During that same period, the overnight loans rate was between 1.0 percent and 0.25 percent a year. a) What role does the long-term real interest rate play in the monetary policy transmission process? b) How does the overnight loans rate influence the long-term real interest rate? c) What do you think happened to inflation expectations between 2010 and 2017 and why? Problem 3 Millennials Should Shop Around for Banks Banks are in business to make money for their shareholders, not to put the interests of customers first. This key fact should not be overlooked. Banks sell financial services and compete hard for business. They want to be seen as the friend of students and offer no-cost accounts But banks are not equal. By shopping around, you can get the deal that's best for you. Source: The Globe and Mall, September 19, 2016 a) Explain how this news clip illustrates the attempts by banks to maximize profits. b) Why would banks want to be seen as friends of students and offer student accounts with no charges? Problem 4 1869 1879 Quantity of money $1.3 billion $1. billion Real GDP (1929 $7.4 billion 2 dollars) Price level (1929 = X 54 100) Velocity of 4.50 4.61 circulation The table provides some data for the United States in the first decade following the Civil