Question

The following questions refer to the graph below. MO Interest Rate Moº - Quantity of Money a. Explain (and show in the diagram) why the Bank of Canada cannot independently set the money supply and the interest rate. (Hint: try explaining what would happen if the bank did try holding the money supply where it is and set the interest rate above or below the equilibrium above.) (4 marks) b. Suppose the Bank leaves the money supply unchanged but that the demand for money increases. Show this in the diagram. What happens to interest rates? What happens to investment? (4 marks) C. In the situation of part b, explain why monetary policy has been contractionary even though the Bank of Canada did not change the money supply. (2 marks)

Answer 1

Answer Ma rate Interest A Quantity of money, Bank of Canada Cannot independently set. money supply as it is som total of money an circulation total of bank deposit and' money created by Commercial bonic in particular Economy .& canada cannot set andepende ntly and interest rate can't be set independently as it targeted because bank can either target money supplus..or interest rate that is also depend upon money demanded in Economy. Money Supply increased than intersection point with money demanded interest rate will fall and MiQ Versa. Money supply is fixed but demand to money increase then interest of rate will by Mora

also increase as supply of money decrease compare to demand for money only interest rate rise Investment will decrease as interest rate and Investment are inversely relate to Each other Monetary policy is contra actinay n a halte even though bank of Canada has not ancrease morey Supply because Increase in miney demand lead to inflation also that might affect Economy adversely. . As. derrand to money lead to high price of goods and service in Economy. second reason might investment as rise in Interest rate leads to face in investment so it target to enact the money supply at as Existing level otherwise investment will decrease