Econ 248 Assignment 2

ECON 248 Assignment 2 1. The chamfer lay is the come to rate at which the hope of Canada stands ready to lend reserves to leased banks. The bankers trust rate is the wager rate that the Bank of Canada pays banks on their deposits at the Bank of Canada. Changes to these rates by the Bank of Canada typically spread to opposite inte substitute rates and therefore leave influence the nub of bring done by the banks. An afford market opeproportionn is the purchase or sale of government securities, which are government of Canada Treasury bills and bonds, in the open market by the Bank of Canada.These transactions done by the Bank of Canada veer the reserves of the banks, which extradite an immediately pertain on the measuring of overnight sorbing. This changes the Bank of Canada to hit its overnight rate scratch. Government deposit shifting is the practice of shifting government deposits between the governments account at the Bank of Canada and its accounts at the various hired banks. These shifts of deposits affects the banks reserves, and therefore their ability to leave overnight loans.Since this tool is typically practice sessiond on a grim scale to smooth daily fluctuations in the amount of overnight loans, its impact on the implementation of pecuniary policy is small. The call for reserve ratio is the portion of depositors balances banks must have on hand as cash, as determined by the central bank. The monetary policy of a required reserve ratio is no longer in use by the Bank of Canada. The Bank of Canadas policy tools work by changing the sum of money of money in the economy, by changing the monetary base.By airlift the bank rate, the Bank of Canada dismiss make it to a greater extent costly for the banks to borrow reserves. By raising the please rate it pays the banks on their own deposits at the Bank of Canada, it can induce the banks to take to hold bigger reserves. By swoping securities in the open market, the Bank of Canada c an flow the monetary base. The Bank of Canada can also decrement bank reserves and the monetary base by switching some government of Canada deposits from a chartered bank to itself. These actions decrease the mensuration of money, other things remaining the same. . L = (1 0. 35) X (1 0. 07) L = 0. 6 beat of money created = $50,000,000 X 1/(1 0. 6) Quantity of money created = $50,000,000 X 2. 5 Quantity of money created = $125,000,000 3. a) The multiplier is the amount by which a change in any component of sovereign white plague is magnified or multiplied to determine the change that it generates in equilibrium wasting disease and authorized gross internal product. Investment expenditures accession combine expenditure and real gross domestic product. The augment in real GDP ontogenys disposable income, which augments utilization expenditure.The increased consumption expenditure adds even more to store up expenditure. authentic GDP and disposable income increase fu rther, and so does consumption expenditure. The initial increase in investment brings an even bigger increase in aggregate expenditure because it induces an increase in consumption expenditure. The multiplier determines the magnitude of the increase in aggregate expenditure that results from an increase in investment or another component of autonomous expenditure. The greater the marginal propensity to consume, the larger is the multiplier. ) The marginal propensity to import and the marginal appraise rate unitedly with the marginal propensity to consume determine the multiplier. Their combined influence determines the gear of the aggregate expenditure curve. Since Multiplier = 1 / (1 Slope of AE curve) and the marginal task rate determines the extent to which income tax payments change when real GDP changes, the size of the multiplier will decrease depending on the extent to which the marginal tax rate reduces the run of the AE curve. ) The slope of the AE curve equals 0. 75 Multiplier = change in real GDP/change in investment = 1/(1-MPC) Multiplier = 1/(1-0. 75) = 1/0. 25 = 4 The revised slope of the AE curve equals 0. 45 Multiplier = change in real GDP/change in investment = 1/(1-Slope of AE curve) Multiplier = 1/(1-0. 45) = 1/0. 55 = 1. 818181812 4. a) Given that the increase in unemployment means a decrease in real GDP, and that consumer consumption and investment spending reductions mean a fall in aggregate beg, the economy is in recession.This is due to a fall in aggregate demand, and the fall in investment whitethorn lead to higher costs of production in the future. b) In a recession, the number of people experiencing economic hardship increases, so induced conveyance payments such as unemployment benefits and welfare benefits increase. Induced taxes and induced transfer payments decrease the multiplier effect of a change in autonomous expenditure such as investments, and moderate recessions making real GDP more stable. Discretionary fiscal policy would be used in an render to restore full employment.The government might increase its expenditure on goods and services, cut taxes, or do some of both, increasing aggregate demand. An increase in government expenditure or a cut in taxes increases aggregate expenditure as well. c) In a recession, the Bank of Canada will conduct an open market purchase to lower the interest rate. The sum of money of investment will increase, and other interest-sensitive expenditure items will also increase. With an increase in aggregate expenditure, the multiplier increases aggregate demand, bringing real GDP to equal potentiality GDP, and a recession will be eliminated. . Keynesianism is by and large defined as the economic view that, left to itself, the economy may not fully employ the resources available, and that expansionary governmental action may be required to achieve full employment and growth. Monetarists, in contrast, pretend mostly that the principal economic task of governme nt is to regulate the money supply, and in particular set limits to it, and that achievement of adequate levels of employment and growth can be left to the market. Historically, Keynesians avoured fiscal policy and monetarists favoured monetary policy as the tool for stabilizing aggregate demand. Today, the divide between the two schools on this issue has almost vanished. Monetarists favour a target growth rate for the touchstone of money, and feel that not keeping money growth on target risks come outbursts of inflation. Keynesians favour a target for the interest rate, and feel that aggregate demand can be controlled more accurately by preventing the interest rate from fluctuating too wildly, which it might do with strict targeting of the quantity of money and its growth rate.When real GDP falls below potential GDP, Keynesians feel that taking swift action to stimulate the economy by cutting the interest rate and increasing government expenditures is the most legal road to take . Monetarists feel the best that stabilization policy can do to achieve a high level and growth rate of real GDP is to keep inflation in check. Monetarists favour an inflation target at a low inflation rate. When the inflation rate rises, monetarists want swift action to slow it regardless of the state of real GDP. 6. a) kilobyte wads of breadfruit / 500 tons of fish = 2The luck cost of 1 unit of fish in Kiribati is 2 units of breadfruit. b) 750 tons of breadfruit / 1875 tons of fish = 0. 4 The fortune cost of 1 unit of fish in Tuvalu is 0. 4 units of breadfruit. c) Tuvalu has a proportional reward because it is able to produce fish at a lower opportunity cost than can Kiribati. d) Kiribati will import fish from Tuvalu because Tuvalu has the comparative favor in the production of fish. 7. The three main purposes for protection and restricting outside(prenominal) trade are i. the employment air ii. the infant-industriousness argument iii. the fling argumentThe employment argument is that if a country imports cheap unusual goods, local anesthetic workers lose their jobs and become a drain on the welfare system, spending less, and causing a ripple effect of further job loss. The proposed rootage is to ban imports of cheap foreign goods and to protect local jobs, moreover that marriage proposal is flawed. Free trade does cost some jobs, but it also creates jobs. It brings roughly global rationalization of labour and allocates resources to their highest valued activities. Local jobs are preoccupied, but jobs are created in the foreign countries that now produce those goods.The local workers who lost their jobs now have better paying jobs because export industries have expand and created more jobs than have been destroyed. Another point is that imports create jobs. They create jobs for retailers that sell imported goods and for steadfasts that service those goods. They also create jobs by creating incomes in the rest of the world, some of which ar e spent on imports of locally made goods and services. The infant-industry argument for protection is that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets.The argument is based on the idea of dynamic comparative advantage, which can arise from learning-by-doing. Learning-by-doing is a powerful engine of productivity growth, and comparative advantage evolves and changes because of on-the-job experience. These facts, however, do not justify protection. The infant-industry argument is except valid if the benefits of learning-by-doing accrue not only to the owners and workers of the firms in the infant industry but also spill over to other industries and parts of the economy. toss away occurs when a foreign firm sells its exports at a lower impairment than the monetary value at which the product is normally sold in the foreign firms domestic market. A firm that wants to gain global monopoly might use dumping, sell ing its output in the domestic market at a price that is low enough to drive domestic firms out of business. When the domestic firms are gone, the foreign firm takes advantage of its monopoly and charges a higher price for its products. This practice is the typical justification given for anti-dumping tariffs. There are reasons for resisting the dumping argument for protection.First, it is virtually impossible to detect dumping. The test for dumping is a weak one because it can be rational for a firm to charge a lower price in markets in which the quantity demanded is highly sensitive to price and a higher price in a market in which demand is less price-sensitive. Second, it is hard to think of a good that is produced by a inwrought global monopoly. steady if all the domestic firms in some industry were driven out of business, it would always be possible to find many alternative foreign sources of supply and to buy at prices determined in competitive markets.Third, if a good or se rvice were a truly global natural monopoly, the best way to deal with it would be by ordination. Such regulation would require international cooperation. 8. a) Exports to the US would decrease due to lower demand because it would cost US importers more to purchase Canadian goods. b) Canadian importers would implement a decrease in cost when importing machinery and equipment from US suppliers. c) vitiate border shoppers would pay less for goods they purchase in the US. ) If the retired Canadians have US dollar bank accounts, the fluctuation of the Canadian dollar would likely have little effect on them. However, if they have Canadian dollar bank accounts or have Canadian currency, they can buy more with those Canadian dollars. 9. Current account Exports of goods and services+411 Imports of goods and services-378 Net transfers+3 Net interest payments-34 Current account balance+2 Capital account impertinent investment into Canada+22 Canadian investment abroad-35 Statistical discrepa ncy+10 Capital account balance-3 Official settlements account Official settlements account balance-1