 # ECO1002C Assignment 2.docx - ECO1002C- Introduction to...

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ECO1002C- Introduction to Economics (Macroeconomics)Assignment #2C04Question 1A.If bank of Canada sells two million of government bonds, then the reserve will bereduced by \$2 millions*20% =0.4 millionsandthe money supply will increase by = \$2millions*1/0.20 = \$2*5 =\$10 millions.B.Banks will choose to maintain excess reserve for the expectancy in the future. So newmoney multiplier = 1/0.05 =20 Times.Money supply will increase by = \$2*20 =\$40 millions.Question 2A.Before tax real interest rate = Nominal interest rate-inflation15%-5%=10%After-tax nominal interest rate = Nominal interest rate * (1-tax rate)15%*(1-50%) = 7.5%Real after-tax interest rate = Nominal after tax interest rate-inflation rate7.5%-5% =2.5%B.Before tax real interest rate = Nominal interest rate-inflation7%-2% = 5%After-tax nominal interest rate = Nominal interest rate * (1-tax rate)7%*(1-50%) = 3.5%Real after-tax interest rate = Nominal after tax interest rate-inflation rate3.5%-2% =1.5%C.Before tax real interest rate = Nominal interest rate-inflation3%-1% = 2%After-tax nominal interest rate = Nominal interest rate * (1-tax rate)3%*(1-50%) = 1.5%Real after-tax interest rate = Nominal after tax interest rate-inflation rate1.5%-1% =0.5%Question 3

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