Supply and foreign exchange market operation

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Reference no: EM1311423

1. According to the quantity theory of money, what is the effect of an increase in the quantity of money?

2. Suppose 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.

i) Explain what happens to the Canadian money supply.

ii) Now suppose that the Bank of Canada does not want the money supply to change. What would it need to do to sterilize its foreign exchange market operation?

3. What is the maximum amount that the money supply can increase when $1,000 cash is injected into a banking system with a 20-percent reserve requirement? Give two reasons why this maximum may not be reached.

Reference no: EM1311423

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