Central Banks - open market operations - open-market operations and the foriegn Exchange Market

6 important questions on Central Banks - open market operations - open-market operations and the foriegn Exchange Market

What happens when the canadian dollar appreiciates relative to the US dollar?

This will affect our exports negatively

What can canada to to prevent the canadian dollar from depreciating? What would it look like in the balance sheets? What happens to the monetary base? Why? What happens to money supply?

  • The central banks buy canadian dollars on the foreign exchange market receiving foreign currency in exchange
  • decrease in assets in the form of foreign currency, and an decrease in liability in the form of bank notes in circulation
  • because the CAD it buys are no longer in private use the monetary base is reduced
  • this is called an open market sell which will contract the money supply

What happens when the canadian dollar is floating?

It is controlled by the forces of demand and supply, appreciating and depreciating as the market sees fit.
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What happens when the exchange rate is fixed?

The central bank must continually intervene in the foriegn exchange market to offset those market forces that would other wise change the value of the canadian dollar

What is the disadvantage of the fixed exchange rate?

If the central bank adopts a fixed exchange rate, it loses control over the timing, magnitude of its open market operations
the control over domestic monetary base

What is the difference between a fixed exchange rate and a floating exchange rate?

  • A fixed exchange rate is inconsistent worth the independent monetary policy
  • A floating exchange rate is what permits independent monetary policy

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