Functions of the bank of canada short answer

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Mathematical Applications for the Management, Life, and Social Sciences
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Chapter 1 / Exercise 54
Mathematical Applications for the Management, Life, and Social Sciences
Harshbarger
Expert Verified
Topic: 09-03 Functions of the Bank of CanadaShort Answer Questions126. What are the two determinants of the transactions demand for money? The two major determinants of the transactions demand for money are the price level and the real GDP of the economy (together, they make up the nominal GDP). An increase in either will increase the transactions demand for money. (The transactions demand is also affected byinstitutional factors like the efficiency of the payments system, the use of electronic money and so on.)Accessibility: Keyboard NavigationBlooms: RememberBlooms: UnderstandDifficulty: EasyLearning Objective: 09-01 Describe the determinants of money demand and supply; and explain how equilibrium in the money market is achieved.Topic: 09-04 The Demand for Money9-58
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Mathematical Applications for the Management, Life, and Social Sciences
The document you are viewing contains questions related to this textbook.
Chapter 1 / Exercise 54
Mathematical Applications for the Management, Life, and Social Sciences
Harshbarger
Expert Verified
Chapter 09 - The Money Market and Monetary Policy127. How does a surplus of money disappear? A surplus of money would lead people to get rid of the excess by buying bonds. This would increase the demand for bonds, so pushing up their prices, which implies a lower interest rate. As the interest rate drops, people's desire to hold money will increase; this process continues to the point that at a lower interest rate people's desire to hold money is equal to the supply of money; in other words, until the surplus has disappeared.Accessibility: Keyboard NavigationBlooms: RememberBlooms: UnderstandDifficulty: MediumLearning Objective: 09-01 Describe the determinants of money demand and supply; and explain how equilibrium in the money market is achieved.Topic: 09-05 Equilibrium in the Money Market128. Explain how an increase in the money supply affects the interest rate, investment, and income. How do the Keynesians and the monetarists differ in their views on this? An increase in the supply of money causes a surplus of money. People react by buying bonds, causing the price of bonds to increase and the interest rate to drop. The lower interest rate willlead to an increase in investment and in income.The process is more direct, according to Monetarists, since the surplus of money will lead to an increase in spending (not just on bonds) which will lead to an increase in aggregate demand and in nominal income.Accessibility: Keyboard NavigationBlooms: RememberBlooms: UnderstandDifficulty: MediumLearning Objective: 09-03 Explain why monetarists believe that controlling the money supply is vital.Topic: 09-11 Contrasting Keynesian and Monetarist Policies9-59
Chapter 09 - The Money Market and Monetary Policy129. How and why is the asset demand for money related to the interest rate? There is an inverse relationship between the interest rate and the asset demand for money. This is because the interest rate represents the opportunity cost of holding money (idle balances). The higher the interest rate, the more that is lost by holding money; therefore people will tend to hold as little as possible (instead putting their money into bonds and other income-earning assets).

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