Question

1.Suppose the Bank of Canada sells government bonds. Use a graph of the money market to show what this does to the value of money. (6 marks)

2.Using separate graphs, demonstrate what happens to the money supply, money demand, the value of money, and the price level if:
a. the Bank of Canada increases the money supply.
b. people decide to demand less money at each value of money.

3.Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? (5 marks)

Answer 1

Page No.. Dette takes When the central bank sells government bonds, it away money from people's hands, hence contracting money n Value 1 S s Money The value of money increases when Bank of Canada sells bonds. Money Demand supply, it shifts 2. a) When Bark & Canada increases money the supply chose to the right. Price Pi - - - - -Money Denard The price level decreases with So does the value of money. increase in money supply.

money at each 2. (b) When people decide to demand less money value of money, it shifts the demand nowe to the left." Money supply parallely in price level With and decrease the value the money of money demand, the also decreases.

3. Hyperinflation is the phenomenon of out-of-control and rapid increase in prices in an economy.
One of the main reasons for hyperinflation is excessive money supply. When there is a depression in an economy, the central bank, in order to give impetus, increases the money supply, but the increase in the money supply is not matched with slow or negative growth of the GDP. This leads to hyperinflation as businesses are increase prices to earn profits and consumers have more money to spend.

To combat hyperinflation, the policy framework should not only focus on monetary aspect but also fiscal aspect. The government can reform its tax regime, its spending etc to raise confidence amongst people and businesses. It can also be combated by adopting a new currency to stabilize the prices.