Name: Nguyen Phan Thanh Thuy

Student ID: HS163426

ECON 121: MACROECONOMICS PRINCIPLES

INDIVIDUAL ASSIGNMENT

Deadline: 23:59 Monday, Oct 17th, 2022. Submissions accepted only via Edunext.

1. During 2011 the inflation rate in Brazil was about 6.6% while in the U.S. it was about
3.3%. At the start of 2011 the nominal exchange rate was about 1.7 Brazilian real per
U.S. dollar. (2pts)
If purchasing-power parity holds, about what should the nominal exchange rate have
been at the end of 2011? Show your work

US inflation rate = 3.3% = 0.033

Brazil inflation rate = 6.6% = 0.066

Nominal Exchange Rate at beginning of year = 1.7 Brazilian real per dollar

Nominal Exchange Rate at the end of the year

= Nominal Exchange Rate at beginning of year x (1+ Brazil inflation rate)/(1+ US inflation
rate)
= 1.7 (1+0.066)/(1+0.033) = 1.7543 Brazilian real per dollar.

2. Suppose the Fed sells government bonds. Use a graph of the money market to show
what this does to the value of money. Explain what happens. (4pts)

- When the Bank of Canada started selling Government bonds, people started buying those
bonds with the money they had on hand. Therefore, automatically the money supply will go
down in the economy. In addition, when the Bank of Canada issues new government bonds in
the market, the bond supply will increase and decrease bond prices. Bond prices and popular
interest rates in the market have an inverse relationship, so when prices fall, interest rates will
increase, leading to a decrease in the money supply in the economy. When the money supply
decreases, the economy faces deflation which impacts the time value of money. Due to
 deflation. The value of money increases over time.

3.Using separate graphs, demonstrate what happens to the money supply, money demand,
the value of money, and the price level if people decide to demand less money at each value
of money. (4pts)

- If Bank of Canada increases money supply that results a decrease in the value of money as
money supply increases the economy faces an inflation