To fight the economic slowdown from the Covid-19 pandemic, the Bank of Canada decides to expand the money supply.a) Using diagrams, carefully explain whether or not this policy would be effective under a fixed value for the exchange rate?b) What is the effect of this policy on the interest rate in the long run? Explain your answer. Suppose the Bank of Canada decided to fight the present level of high unemployment by targeting 4% inflation rather than 2% inflation.What will happen to unemployment in the short run? What will happen to unemployment in the long run? Use a Phillips Curve diagramto illustrate your answer.

(Note: The first question has been solved). Question 1: (a) The Mundell-Fleming model is a…

To fight the economic slowdown from the Covid-19 pandemic, the Bank of Canada decides to expand the money supply. a) Using diagrams, carefully explain whether or not this policy would be effective under a fixed value for the exchange rate? b) What is the effect of this policy on the interest rate in the long run? Explain your answer.

To fight the economic slowdown from the Covid-19 pandemic, the Bank of Canada decides to expand the money supply. a) Using diagrams, carefully explain whether or not this policy would be effective under a fixed value for the exchange rate? b) What is the effect of this policy on the interest rate in the long run? Explain your answer.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter19: The International Monetary System: Order Or Disorder

Section: Chapter Questions

Problem 3DQ

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To fight the economic slowdown from the Covid-19 pandemic, the Bank of Canada decides to expand the money supply. a) Using diagrams, carefully explain whether or not this policy would be effective under a fixed value for the exchange rate? b) What is the effect of this policy on the interest rate in the long run? Explain your answer.
Suppose the Bank of Canada contracts the money supply in an effort to reduce aggregate demand by a particular amount, say $10 billion. If Canada was a closed economy, would the amount by which the Bank of Canada would need to reduce the supply of money to accomplish this goal be greater or smaller than the amount it would need to reduce the supply of money if Canada was a small open economy with a flexible exchange rate?
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