View the step-by-step solution to:


If the Bank of Canada purchases $500 million worth of bonds from the public in an open market operation, calculate

the change in quantity of money that will eventually result. Assume that the currency drain is 0.20, and that the desired reserve ratio is 0.10. 

a) Define the marginal propensity to consume and explain its role in determining the size of the multiplier. 

b) Explain how the size of the multiplier will change when one brings in the role of imports.  


c) Using the concepts in parts (a) and (b) above, calculate the slope of the AE curve and the size of the multiplier if MPC = 0.80. Then, calculate the revised Slope of the AE curve and the multiplier when you know that the marginal propensity to import is 0.15 and the marginal tax rate (induced tax rate) is 0.2. 

Top Answer

The change in money supply is $1500 million. a. The marginal propensity to consume (MPC) is defined as... View the full answer

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question