ANSWER KEY - Econ 1012 A & B – Spring 2024 – Crowdmark Assignment #5: Chapter 8 & Chapter 9 – Worth = 3%

Made Available in Moodle on Wednesday, March 13th, 2024.

DUE: Tuesday, March 19th by 11:59 PM – MUST BE UPLOADED BACK INTO MOODLE

USE THE SPACE PROVIDED ON THIS ASSIGNMENT FORM – LOAD BACK in to Crowdmark PAGE BY PAGE ONLY

Crowdmark Assignment: PAGE #1: Q#1 (10); Q#2 (4); Q#3 (10); Q#4 (2); Q#5 (2) for a Total of 22 Marks for Page #1

1. Given the following information, answer the follow questions:

• Currency outside banks: $15 billion • Personal and non-personal chequable deposits: $40 billion
• Personal non-chequable deposits: $50 billion • Non-personal non-chequable deposits: $125 billion
• Fixed term deposits: $200 billion

a) The value of MI is $_=__[15 + 40] = $55__________________________________(Show Work)

b) the value of M2 is $__[(M1) + 50 + 125 + 200] = $430___________________ (Show Work)

2. The information describes a banking system. All banks are holding their desired reserves.
Actual reserves in banking system $1,000
Total chequable deposits $5,500
Securities held by chartered banks $1,000
Currency outside banks $500

a) The quantity of money as measured by M1 is equal to _= [$500 + $5500] = $6000____________ (Show Work)

b) The reserve ratio equals ____= [(1000/5500)*100] = 18.2%___________________________________ (Show Work)

3. The Bank of Speedy Creek has chosen the following initial balance sheet:

a) M1 = _[(32%*500) + (500] = [160 + 500] = $660 ________ (Show Work)

b) Johnny goes into the Bank of Speedy Creek and deposits $10. After
Johnny's deposit, but before any other actions occur, the total amount of
money in the economy is now ____Same Answer as in A. (It did not
change.)_______ (Show Work)

c) The reserve ratio equals __= [(40/500)*100] = 8%______________ (Show Work)

d) Suppose all the banks in the banking system have the same reserve ratio as the Bank of Speedy Creek. If the currency
drain ratio is 32 percent, what is the size of the money multiplier? _= [(1 + 32%)/(32% + 8%)] = 3.3______

e) If the Bank of Canada sells $10 worth of Bonds to the Bank of Speedy Creek, the money supply would
[INCREASE/DECREASE] by the amount of _= [3.33 * 10] = 33.0___________ (Show Work)

4. In Australia, the quantity of M1 is $150 billion, the currency drain ratio is 33 percent of deposits and the reserve ratio is 8
percent of deposits. What is the monetary base? _______46.2____________ (Show Work)
Money Multiplier = [(1 + C/D)/(C/D + R/D)] = [(1 + 33%)/(33% + 8%)] = 3.243
Monetary Base = MB = [(M1)/(Money Multiplier)] = [150/3.243] = 46.24 or 46.2

5. Suppose that the banking system has excess reserves of $10 million, the desired reserve ratio is 10 percent and the
currency drain ratio is 40 percent. By how much will the quantity of money increase? _______28____ (Show Work)
Money Multiplier = [(1 + C/D)/(C/D + R/D)] = [(1 + 40%)/(40% + 10%)] = 2.8

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 Change in Money Supply = [(Money Multiplier) * (Change in Excess Reserves)] = [2.8 * 10] = 28
Crowdmark Assignment: PAGE #2: Q#6 (5) & Q#7 (5) & Q#8 (10) for a Total of 20 Marks for Page #2

6. . Use the figure below to answer the following questions.

A) Which one of the “Points above” best shows the effect of a Increase in real GDP?
__E________

B) Which one of the “Points above” best shows the effect of an Decrease in real GDP?
__F________

C) Which one of the “Points above” best shows the effect of a rise in the price of market
bonds? C_

D) Which one of the “Points above” best shows the effect of a fall in the price of market bonds?
B_

E) Which one of the “Points above” best shows the effect of a rise in the price level? __None________

7 . Use the table below to answer the following questions.

A B C
1 r Y0 Y1
2 7 1.0 1.5
3 6 1.5 2.0
4 5 2.0 2.5
5 4 2.5 3.0
6 3 3.0 3.5
7 2 3.5 4.0
8 1 4.0 4.5

The spreadsheet provides information about the demand for money; where, Column A is the nominal interest rate, r. Columns B
and C show the quantity of money demanded at two different levels of real GDP: Y0 is $10 billion and Y1 is $20 billion.

A) Assuming the quantity of money is $3 billion when Real GDP (Y1) is $20 billion, if the nominal interest rate is LESS than
4% a year, then answer the following questions:

a. [Excess Demand for Money/Excess Supply of Money] & [Excess Demand for Bonds/Excess Supply of Bonds]

b. [Buy Bonds/Sell Bonds] & [Price of Bonds Rise/Price of Bonds Fall]

c. [Nominal Interest Rate Rises/Nominal Interest Rate Falls]

8. Canada is currently in an Inflationary Period. The Bank of Canada could use the "Traditional" Monetary Policy to
"Cool" off the Canadian Economy by contracting the money supply. Answer the following questions:

1. Will the Bank of Canada (Buy/Sell) securities from Chartered Banks?

2. Will the Bank of Canada (Increase/Decrease) the Chartered Banks Reserves (a.k.a CB Deposits at the Bank of
Canada)?
3. As a result the Chartered Banks will (Loan Out their ER/Call In Loans).

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4. Through the Money Creation Process, money is (Re-deposited/Called In) within the Banking System.
5. The Money Supply will DECREASE and (Shift Right/Shift Left) in the Money Market.
6. Creating an (Excess Supply of/Excess Demand for) Money.
7. Which results in an (Excess Supply of/Excess Demand for) Bonds.
8. (Buy/Sell) Bonds?
9. Bond Prices will (Rise/Fall).
10. Nominal Interest Rates will (Rise of Fall).

Crowdmark Assignment: PAGE #3: Q#9 (8); Q#10 (8) & Q#11 to #16 (1 Mark Each) for a Total of 22 Marks for Page #3

9. Currently within the Canadian Banking System (The Heart of the Circular Flow Chart), the total amount of deposits held
by the Chartered Banks is $300 billion; while their reserves are $15 billion; with (1/3) held in their vaults and (2/3) held at
the Bank of Canada as Chartered Banks Deposits. A combined total of $30 billion in cash is held by Households and Firms
outside of the Chartered Banks in the from of paper bank notes. There are no coins! Assume the Chartered Banks begin
with no excess reserves; and then Bank of Canada increases the Chartered Banks Reserves through Open Market
Operations (OMO) by $0.5 billion. Answer the following questions. Show Your Work

A) Calculate the reserve ratio. ____ R/D Ratio = [(R)/(D)] * 100 = [15/300]*100 = 5%_

B) Calculate the currency drain ratio. ____ C/D Ratio = [(CHBP)/(D)] * 100 = [30/300]*100 = 10%_____

C) Calculate the money multiplier. ____ Money Mulipler = [(1 + 10%0/(10% + 5%)] = 7.333333%

Calculate by how much the money supply will change._

a. Change in Money Supply = [(Money Multiplier) * (Change in ER)] = (7.33333*0.5) = $3.67 Billion

10. Currency 2016 Exchange Rate 2017 Exchange Rate

EU euro 2 euros/Canadian dollar

Japanese yen 120 yen/Canadian dollar 3 euros/Canadian dollar
90 yen/Canadian dollar
a. 2016: EU Euro was trading for ____60___(Correct Answer) ____________________ Japanese yen.
b. 2016: Japanese yen was trading for ______0.1667______________ EU Euro.
c. 2017: EU Euro was trading for __30___(Correct Answer) ___________ Japanese yen.
d. 2017: Japanese yen was trading for _____0.0333_______________ EU Euro
e. Between 2016 and 2017, the Japanese yen (appreciated/depreciated) against the EU euro while the EU
Euro (appreciated/depreciated) against the Japanese yen.
f. Between 2016 and 2017, the dollar (appreciated/depreciated) versus the euro and
(appreciated/depreciated) versus the yen.

11. Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys $0.80 U.S, and
1 Canadian dollar buys 5.0 Chinese yuan. How many yuan will $1 U.S. buy? __1 US = 6.25 Yuan

12. Consider the market for Canadian dollars. If the exchange rate rises from 2 Mexican pesos per dollar to 4
Mexican pesos per dollar, [a movement down along the demand curve for Canadian dollars occurs/a shift of
the demand curve to the left/a movement up along the demand curve for Canadian dollars occurs].

13. Suppose the exchange rate between the Canadian dollar and the British pound is 0.5 pounds per dollar. If a pair
of jeans sells for 38 pounds in Britain, purchasing power parity holds, the price of the jeans in Canada are _$76__

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 14. Suppose that the following situation exists in the foreign exchange market. 1 Canadian dollar buys 9.47 South
African rand. If the price of a bottle of South African wine is 53 rand, what is the price in Canadian dollars if
purchase power parity exists? ______= (53/9.47) = $5.60____________________________

15. Initially the exchange rate between the South Korean won and the Canadian dollar is 950 won per dollar. If the
exchange rate rises to 1,000 won per dollar and the Canadian and South Korean price levels do not change, then
in the short run the real exchange rate (rises/falls).

If the price level in Canada is 120, the price level in South Africa is 140, and the exchange rate is 7 South African
rands per dollar, then the real exchange rate is _ R = En *(Pc/Psa) = [7*(120/140)] = 6
16. .
Crowdmark Assignment: PAGE #4: Q#17 & #18 (1 Mark Each); Q#19 (4); Q#21, #22, #23 (10 Marks Each) for a Total of
36 Marks for Page #4

17. Suppose interest rates are 3 percent in Japan and 6 percent in Canada. The current value of the exchange rate is
110 Japanese yen per dollar, and it is generally expected that in one year the exchange rate will be 106.7 yen per
dollar. Under these circumstances interest rate parity is (violated/not violated).

18. A very small country is an international borrower and its demand for loanable funds increases. As a result, the
equilibrium quantity of loanable funds used in the country [increases/decreases/does not change] and the
country's foreign borrowing [increases/decreases/does not change].

19. On Cyber Monday I was trying to decide whether to buy my new runners at Sportschek in Lethbridge for
$249.99 plus GST of 5% OR to buy them "online" from the US with free shipping for $189.99. If the Canadian
Dollar is worth 0.7584 US, then should I buy the runners locally or "online"? NOTE: You MUST convert the US
price of the runners into Canadian dollars to compare prices in Canadian dollars. Show Your Work.

In Canada: [$249.99 *1.05] = $262.49 In the US: [ $189.99 *(1/0.7584)] = $250.51 Buy in the US

21. Draw a Graph of the Market for Canadian Dollars illustrating the consequences on the Canadian Exchange Rate if the
prices of goods and services in Canada rise, while in the US, prices hold steady. Label Carefully.

2 Marks for Demand & Supply Set Up for the Foreign Exchange Market
2 Marks to Shift Demand Curve to the LEFT
2 Marks to Shift Supply Curve to the RIGHT
2 Marks to Label the NEW Exchange Rate
2 Marks to Label the New Quantity of Canadian Dollars is UNKNOWN

22. Draw a Graph of the Market for Canadian Dollars illustrating the consequences on the Canadian Exchange Rate if the
United States is in a recession. Label Carefully.

2 Marks for Demand & Supply Set Up for the Foreign Exchange Market
2 Marks to Shift Demand Curve to the LEFT
3 Marks to Show & the NEW Exchange Rate
3 Marks to Show & Label the New Quantity of Canadian Dollars

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23. Draw a Graph of the Market for Canadian Dollars illustrating the consequences on the Canadian Exchange Rate if the
US interest rate falls, while the Canadian interest rate remains unchanged. Label Carefully.

2 Marks for Demand & Supply Set Up for the Foreign Exchange Market
2 Marks to Shift Demand Curve to the RIGHT
2 Marks to Shift Supply Curve to the LEFT
2 Marks to Label the NEW Exchange Rate
2 Marks to Label the New Quantity of Canadian $ is UNKNOWN