Assignment
Q 1. A new immigrant arrives in Nova Scotia and opens a demand deposit account in the amount of $200,000 with RBC.
a. Show this initial transaction on RBC's balance sheet.
b. Suppose RBC has a target reserve ratio of 5% and it decides to make loans as a result of the transaction in (a). By how much has money supply increased as a result of (a) and (b)?
c. Assume all banks in the banking system have the same target reserve ratio. After infinite rounds of depositing and lending, by how much has money supply increased in total?
d. What would be the possible change in money supply if we also had to consider a cash drain (leakage) of 5%?
Q 2. Canada has just signed a new trade agreement, the Comprehensive Economic and Trade Agreement (CETA) with the European Union (EU). As a result, Canada's economy is expecting to increase exports of raw material to EU countries. Under the deal, EU countries hope to increase their sales of capital equipment and machinery to Canadian firms. In the short-run, overall Canadian net exports are anticipated to decline. However, over the long-run the trade deal will lead to an increase in capital accumulation by Canadian firms. Assume the Canadian economy is in long-run equilibrium before the new deal.
a. Using the aggregate demand-aggregate supply framework, illustrate and explain what happens in the short run.
b. Illustrate and explain what happens in the long run as a result of capital accumulation.
Q 3. Using your understanding of the three functions of money, explain why or why not which of the following could be considered money in the Canadian economy and which would not be:
a. A 10 dollar Canadian bill.
b. A 10 Euro bill.
c. A credit card issued by Scotiabank.
d. A Vincent Van Gogh painting.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.