Q. 1: Assume there is a reserve requirement of 20%. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Bank of Canada decides to increase money supply by $40 million.

If the Bank uses open market operations, will it buy or sell bonds? What quantity of bonds does the bank needs to buy or sell to accomplish the goal. Explain.

Q. 2: Suppose that the Bank of Canada sells 100 million euros from foreign exchange reserves and that the exchange rate is $1.50 Canadian per euro. Explain what happens to Canadian money supply?

Now suppose if the Bank of Canada does not want money supply to change in the economy, what it should do to sterilize the foreign exchange market operation?