Question

1. Suppose the Bank of Canada sells government bonds. Use a graph of the money market to show what this does to the value of money. (6 marks) I 2. Using separate graphs, demonstrate what happens to the money supply, money demand, the value of money, and the price level if: a. the Bank of Canada increases the money supply. (6 marks)

Answer 1

1. As Bank of Canada start to sell the Governmental bonds , people will start to buy those bonds using the money they have in their hand . Thus, automatically money supply will go down in the economy . Alternatively, when bank of Canada issues new governmental bonds in market, supply of bond will rise and that leads to have a fall in the price of bond. Price of bond and market prevailing interest rate have opposite relationship , so when price will go  down rate of interest will go up leads to have decreasing money supply in the economy. As money supply decreases, economy faces a deflation which has an impact on the time value of money . Due to deflation. value of money increases over time.

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2. If Bank of Canada increases money supply that results a decrease in the value of money as money supply increases the economy faces an inflation .

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