Econ 256 INTERNATIONAL MONETARY SYSTEMS Assignment #2 INSTRUCTIONS: You can work on the assignment in a group but each student is responsible to submit his/her own copy of the assignment. The answer to question 1 can be handwritten (if you do not know how to create diagrams in Word, or another text-editor). The answers to question 2 must be typed. Remember that the quality of presentation is important. Total points are 20. 1 Money Supply and Interest Rates: (10 points) Assume prices do not adjust in the short-run but are flexible in the long-run. a. Show how a temporary expansion of the domestic money supply of 2 % affects interest rates and the exchange rate in the short-run. Assume that uncovered interest rate parity holds. Use diagrams and explain the process. b. Assume that the monetary expansion is permanent. How does it affect interest rates and the exchange rate in the short run? Use diagrams and explain the process. c. What is the impact of the permanent expansion in the long-run? Contrast this with the short- run. d. (Spillover) Now show how a permanent expansion of the foreign money supply of 2 % affects domestic interest rates and the exchange rate in the short-run. Assume that uncovered interest rate parity holds. Use diagrams and explain the process. e. What is the impact in the long-run on the domestic economy of a rise in foreign money supply? Contrast with the short-run in (d). f. What happens if both countries expand money supply by 2%? 2 International Reserves (10 points) We got some experience working with Canadian data available through Statistics Canada in Assignment 1. In this question we access the International Monetary Fund (IMF) data. Working with IMF data may be a little bit more frustrating than with Statistics Canada data. The first database we look at is International Reserves and Foreign Currency Liquidity (IRFCL) at http://data.imf.org/?sk=2DFB3380-3603-4D2C-90BE-A04D8BBCE237. This database contains information on official foreign exchange reserves (and other data as well). The second database is World Economic Outlook at World Economic Outlook Database (imf.org) 1 Econ 256 INTERNATIONAL MONETARY SYSTEMS Assignment #2 a. b. It contains various data from national accounts, balance of payments, trade, commodity prices and much more. Pick Canada and Japan over 2001-2022. Use annual data. One of the supposed benefits of having a flexible exchange rate is that the monetary authority does not need foreign reserves to defend its currency. Plot the Official reserve assets for Canada, from 2001 to 2022. Comment on the pattern. Get data on Reserves and GDP for Canada and Japan. Calculate reserves as a share of GDP for each country. Plot the evolution of shares on a graph. Comment. C. Based on the above, are Canada's reserves large or small? Discuss. d. Pick two more countries: Australia and China and calculate reserves as a share of GDP but only for one year: 2019. What do you conclude about exchange rate arrangements for these countries? Hints and Tips: • ● • • At the IRFCL, pick “Data Query" tab. On the left side, you would see "Time," "Indicator," "Country," and "Sector.” All data in IRFCL are in million US dollars. Once you are done selecting the appropriate entries for the indicators, click on "Export" tab and select ".xlxs" At the WEO database, select “Gross domestic product, current prices, US dollars" Note that data are in billions. After selecting "Data Range” click on "Prepare Report." Note that the data range goes beyond 2022. This is because the database contains IMF's forecasts after 2022. We are not interested in those forecasts. 2

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Econ 256 INTERNATIONAL MONETARY SYSTEMS Assignment #2 INSTRUCTIONS: You can work on the assignment in a group but each student is responsible to submit his/her own copy of the assignment. The answer to question 1 can be handwritten (if you do not know how to create diagrams in Word, or another text-editor). The answer