PQTopicV - v Briefly outline the role of the LVTS(Large...

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Practice Questions: Set 5. Central Banks and the Money Supply Lecture Dates: Jan. 17 th i) What is an open market purchase ? What is its effect on the supply of money? Explain. ii) Suppose that the Bank of Canada decreases the monetary base by selling securities to a commercial bank. a) What are the effects on the Bank of Canada’s balance sheet? b) What are the effects on the balance sheet of the banking sector? iii) Suppose that the Bank of Canada increases the monetary base by buying securities from members of the general public (who pay by writing cheques on deposits held in commercial banks). a) What are the effects on the Bank of Canada’s balance sheet? b) What are the effects on the balance sheet of the public. c) What are the effects on the balance sheet of the banking sector. iv) The Bank of Canada has more control over the level of the monetary base than over bank reserves . Briefly explain why this is the case.
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Unformatted text preview: v) Briefly outline the role of the LVTS (Large Value Transfer System) in the Canadian financial system (i.e. what is it, and what is it for?) vi) Briefly describe the overnight rate and the operating band . Why do we expect the overnight rate to stay within the operating band ? vii) Suppose the Bank of Canada wants to reduce the overnight rate . a) Precisely what actions does it take? b) Explain why these actions cause the overnight rate to fall. c) What are the effects on the Bank of Canada’s balance sheet? d) What is the relationship between the Bank of Canada’s control over the money supply and short term interest rates? Explain. viii) Briefly outline the evolution of U.S. monetary policy over the past 3 years, with reference to changes in the Federal Reserve’s balance sheet. ix) Discuss the impact of the changes outlined in viii) on the money supply....
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