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Monetary policy calculation with currency drain

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If the Bank of Canada sell $100 million worth of bonds to the public in an open market operation, what is the change in quantity of money that will eventually result? Assume that the currency drain is 0.15 and the desired reserve ratio is 0.05. Show your calculations.

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The Reserve Ratio (RR) is the ratio of assets that banks must hold as cash. The Currency Drain Ratio (CDR) is the ratio of assets that people want to ...

Solution Summary

How to calculate the effect on the money supply of an open market transaction by the central bank, accounting for the reserve ratio (RR), currency drain ratio (CDR) and money multiplier (MM).

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IS-LM setup notes


1) Assume last year's real GDP was $7,000 billion, this year's nominal GDP is $8,820 billion, and the GDP-deflator for this year is 120. What was the growth rate of real GDP?

2) Calculate the values for government purchases (G), private domestic saving (S), and private domestic investment (I) from the following information (all variables are in billions of dollars).
national income Y = 5,200 budget deficit BuD = 150
disposable income YD = 4,400 trade deficit TD = 110
consumption C = 4,100

3) "Under a fixed exchange rate system, expansionary monetary policy depletes foreign reserves at the central bank." Comment on this statement with the help of an IS-LM diagram.

Instructions for assignment:

Please highlight the final answers for questions 1 and 2.

In question 2, clearly identify the answers for G, S and I

Please follow the prescribed directions for Question 3

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