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210 final - Q4 Q6(a If the desired reserve ratio on...

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Unformatted text preview: Q4 Q6 (a) If the desired reserve ratio on chequable deposits were set at zero, the amount of multiple deposit expansion would go on indefinitely. Is this statement True/Falsernc ertain, Expiain. (b) Given the following information calculate the affect of 1% increase in Monetary Base on M: Bank deposits are $100 million of which $7 million are kept to meet the daily liquidity requirements. In addition to the deposits public prefers to hold $25 million in cash. (c) If people’s desire to hold cash drops to zero what will be the impact of 1% increase in Monetary Base on M? (a) Explain and demonstrate graphically how targeting interest rates can result in fluctuations in monetary aggregates. (b) Explain the law of one price and the theory of purchasing power parity. (0) Why doesn't the purchasing power parity explain all exchange rate movements? What factors determine long-run exchange rates? (a) Explain the interest parity condition. What key assumption underlies this condition? (b) What factors affect the returns on domestic and foreign deposits? (c) Explain and show graphically the effect of a decrease in the expected future exchange rate on the equilibrium exchange rate. ...
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