1.Explain how each of the following developments would affect the supply of money, the demand formon

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1.Explain how each of the following developments would affect the supply of money, the demand formoney, and the interest rate. For each case, show what happens in a closed economy and in a small openeconomy. Illustrate your answers with diagrams.a. The bank of Canada’s bond traders buy bonds in open-market operations.b. An increase in credit card availability reduces the cash people hold.c. Households decide to hold more money to use for holiday shoppingd. A wave of optimism boosts business investments and expands aggregate demand.e. An increase in oil prices shifts the short run aggregate supply curve to the left.2.Suppose that the government of a closed economy reduces taxes by $20billion, that there is no crowdingout of investment, and that the marginal propensity to consume is ¾.a. What is the initial effect of the tax cut on aggregate demand? 2 marksb. What additional effects follow this initial effect? What is the total effect of the tax cut on aggregatedemand? 4 marksc. How does the total effect of this $20 billion tax cut compare with the total effect of a 20$ billion increasein government purchase? 4 marks3.Suppose the economy is in long run equilibrium.a. Draw the economy’s short and long run Phillips curve 2 marksb. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock onyour diagram from part a. If Bank of Canada undertakes expansionary monetary policy, can it return theeconomy to its original inflation rate and original unemployment rate? 4 marksc. Now suppose the economy is back in long run equilibrium, and then the price of imported oil rises.Show the effect of this shock with a new diagram like that in part a. If the Bank of Canada undertakesexpansionary monetary policy, can it return the economy to its original inflation rate and original unemploymentrate? If the Bank of Canada undertakes contractionary monetary policy, can it return theeconomy to its original inflation rate and original unemployment rate? Explain why this situation differsfrom that in part b. 4 marks4.The economy like the human body, has ‘natural restorative powers,.A. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/aggregatesupply diagram. What happens to total output, income and employment? 4 marksB. If the government does not use stabilization policy, what happens to the economy over time? Illustratethis on your diagram. Does this adjustment generally occur in a matter of months or a matter ofyears? 4marksC. Do you think the ‘natural restorative powers’ of the economy mean that policy makers should be passivein response to the business cycle? 2 marks

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