3 If the nominal exchange rate between the US dollar and the

3) If the nominal exchange rate between the US dollar and the Canadian dollar is C $ 0.89 to the US dollar, how many dollars is required to buy a $ 2.5 CAD product?

Describe and explain the tools used by the central bank to reduce money supply.

Solution

3.

Foe every CAD dollar you will get 0.89 USD

If you are buying a product 2.5 CAD, then USD required is = 2.5* .89 = 2.225

4.

There are many tools with the central bank to control the money supply in economy.

The policy is called monitory policy.

The tools of monitory policy are

1. Bank rate – Central bank control the money by increasing and decreasing interest rate.

2. Reserve requirement – every bank has to maintain a reserve which is decided by the central bank, manipulating the reserve requirement will affect the money supply in the economy.

3 - Open market operations – Central bank control the flow of money in economy by selling and buying government bonds.