Q1. According to the quantity theory of money, illustrate the effect of a raise in the quantity of money?
Q2. Assume that the Bank of Canada sells 100 million pounds sterling from its foreign exchange reserves, and that the exchange rate is $2.40 Canadian per pound sterling.
a) Describe what happens to the Canadian money supply.
b) Now assume that the Bank of Canada doesn’t want the money supply to change. What would it require to do to sterilize its foreign exchange market operation?
Q3. Find out the maximum amount that the money supply can rise when $1,000 cash is injected to a banking system with a 20 % reserve requirement? Give two reasons why this maximum might not be reached.