Topics: Demand For money and mechanism for transmission, Canadian Monetary Transmission

1.Consider a bond that promises to pay (a coupon) $100 one year from now, (a coupon) $100 two years from now, (a coupon) $100 three years from now, and (the principal) $3,000 three years from now. Let's say the market interest rate is 4.5% per year. Assume the bond is risk-free.

a.If the bond is offered for $2,800, should you buy the bond at this price?(1)Explain why or why not.(3)

b.What would be the bond price in market equilibrium?(2)

2.Suppose the Federal Reserve (the USA central bank) increases the money supply in the USA. What would be the effect of this monetary expansion in the USA on the Canadian GDP? Specifically, explain what happens to the Canadian net exports (hint: there is more than one way that the US monetary expansion influences the Canadian net exports, and you should try to describe & explain each of those influences and theoverallimpact).(4)