Review 1022B Chapter 8 and Chapter 9

M1 consists of currency held outside the bank by --------, and ------------ owned by individuals and businesses

• The Bank of Canada and chartered banks; stock

• individuals and businesses; chequable deposits

• businesses and chartered banks; bonds

• government and businesses; credit cards

If the price of a burger is $2.9 Canadian in Toronto and $3 U.S. in New York, and if PPP holds then the change rate is how many U.S. dollars per $1 Canadian?

The leakage of bank reserves into currency is called the currency drain, and we call the ratio of ----- to --------- the currency drain ratio

• reserves; currency

• deposits; currency

• currency; reserves

• currency; deposits

When the nominal interest rate rises, the opportunity cost of holding money------- and the quantity of real money demanded --------

• rises; decreases

• rises; increases

• falls; decreases

• fall; increases

The central bank in Canada is

• the banker to banks and​ governments, the lender of last​ resort, and the sole issuer of bank notes

• the banker to banks and governments, provides general banking services for businesses and individual citizens, and is the sole issuer of bank notes.

• the banker to banks and governments, is responsible for paying all government employees, and is the lender of last resort.

Is the following statement TRUE or FALSE?

Arbitrage in the foreign exchange market achieves the law of one price, no round-trip profit, interest rate parity, and speculating power parity.

• TRUE

• FALSE

Interest rate parity, which means ---------- across currencies, means that for risk free transactions, there is ------ gain from choosing one currency over another.

• lower rates of return; no

• higher exchange rates; a

• equal rates of return; no

• lower exchange rates; a

What exchange rate policy that works like a fixed exchange rate except that the target values changes?

Note that the target might change at fixed intervals (daily, weekly, monthly) or at variable intervals.

Is the following statement TRUE or FALSE?

X-M=(S-I)+(G-T)

If FALSE, derive the formula that shows the correct relationship between net exports, the private sector balance, and the government sector balance.

Identify each component in the formula.

Note: Please review the textbook (page 234) and lecture notes (slide 48) for the correct answer.

• TRUE

• FALSE

Suppose the exchange rate is 1 Chinese yuan per 2.3 Mexican peso, and China wants to keep the exchange rate at a target rate of 1 Chinese yuan per 2.3 Mexican peso.

If the demand for Chinese yuan increases, the People's Bank of China (central bank of China) will

• buy yuans to raise the exchange rate

• buy yuans to lower the exchange rate

• sell yuans to raise the exchange rate

• sell yuans to lower the exchange rate.