Banking system

 

1. Consider a one-year 4% fixed coupon $1million face value bond with one-year to maturity currently held by the banking system. The market price of the bond is initially equal to its face value. Suppose the Bank of Canada buys the bonds for $1.2million and the market value of the bonds rises to this value. Calculate the effective yield on this bond. If the loan ratio L=.75, by how much will the money supply grow if initial open market operations inject $10,000,000? Show what happens to the yield using a money-demand money-supply diagram with money stock on the horizontal axis and effective interest rates on the vertical axis. Discuss how this monetary policy change will affect aggregate demand in the economy.
2. Define industrial policy and discuss the standard tools used to execute industrial policies. From the 1950’s until the 1990’s Japan was considered an example of successful industrial policies. Discuss the evidence that the policies might not have been successful and the political-economic factors that might have caused these policies to be ineffective.
3. Discuss how the free-rider problem and asymmetric information between borrowers and lenders can work against R&D efforts by firms. Specifically the free-rider problem is that unless protected, R&D by firms becomes a public good. The asymmetric information problem relates to the fact that lenders do not have the same information about new technologies or products as the borrower. What are the sorts of policies that can be used to help mitigate these problems?
4. At some point governments will likely use macroeconomic policy to mitigate the negative economic impact of the Coronavirus. Discuss the fiscal and monetary policies that can be undertaken to stimulate the economy, and use an AD-AS framework to show them graphically.

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