Question 1

The interest rate will fall when the:

Accepted Answer

A) quantity of money demanded exceeds the quantity of money supplied. 
B) quantity of money supplied exceeds the quantity of money demanded. 
C) demand for money increases. 
D) supply of money decreases. 
A) quantity of money demanded exceeds the quantity of money supplied. 
B) quantity of money supplied exceeds the quantity of money demanded. 
C) demand for money increases. 
D) supply of money decreases.

Question 2

Refer to the above market for money diagram.If the interest rate was at 8 percent, people would:

Accepted Answer

A) sell bonds, which would cause bond prices to fall and the interest rate to fall. 
B) buy bonds, which would cause bond prices to rise and the interest rate to fall. 
C) have insufficient liquidity, which would cause them to reduce their spending on consumer goods. 
D) buy bonds, which would cause bond prices to fall and the interest rate to rise. 
A) sell bonds, which would cause bond prices to fall and the interest rate to fall. 
B) buy bonds, which would cause bond prices to rise and the interest rate to fall. 
C) have insufficient liquidity, which would cause them to reduce their spending on consumer goods. 
D) buy bonds, which would cause bond prices to fall and the interest rate to rise.

Question 3

The purpose of a restrictive monetary policy is to:

Accepted Answer

A) increase aggregate demand. 
B) decrease aggregate demand. 
C) increase investment demand. 
D) decrease investment demand. 
A) increase aggregate demand. 
B) decrease aggregate demand. 
C) increase investment demand. 
D) decrease investment demand.

Question 4

An expansionary monetary policy is designed to correct a problem of high unemployment and sluggish economic growth.

Accepted Answer

A) True 
 B)False

Question 5

In 2004, the Bank of Canada reduced the overnight rate to as low as:

Accepted Answer

A) 4 percent, in an effort to slow down the economy. 
B) 2 percent, in an effort to slow down the growth of the economy. 
C) 2 percent, in an effort to stimulate the economy. 
D) 3 percent, in an effort to stimulate the economy. 
A) 4 percent, in an effort to slow down the economy. 
B) 2 percent, in an effort to slow down the growth of the economy. 
C) 2 percent, in an effort to stimulate the economy. 
D) 3 percent, in an effort to stimulate the economy.

Question 6

An expansionary monetary policy that is used to stimulate economic growth in the domestic economy:

Accepted Answer

A) increases the overnight rate. 
B) results in a selling of government securities. 
C) is compatible with the economic goal of correcting a trade deficit. 
D) conflicts with the economic goal of correcting a trade deficit. 
A) increases the overnight rate. 
B) results in a selling of government securities. 
C) is compatible with the economic goal of correcting a trade deficit. 
D) conflicts with the economic goal of correcting a trade deficit.

Question 7

Assume that the desired reserve ratio is 20 percent.Suppose that the Bank of Canada sells $500 of government securities to chartered banks and buys $500 of securities from individuals, who deposit the cash in chequing accounts.Refer to the above information.As a result of these transactions, the supply of money in the economy will:

Accepted Answer

A) remain unchanged. 
B) rise by $500. 
C) fall by $100. 
D) fall by $500. 
A) remain unchanged. 
B) rise by $500. 
C) fall by $100. 
D) fall by $500.

Question 8

A headline reads: "Bank of Canada raises the overnight rate by half a point." This indicates that:

Accepted Answer

A) fiscal policy is being offset by monetary policy. 
B) monetary policy is being offset by fiscal policy. 
C) there has been a tightening of monetary policy. 
D) there has been an easing of monetary policy. 
A) fiscal policy is being offset by monetary policy. 
B) monetary policy is being offset by fiscal policy. 
C) there has been a tightening of monetary policy. 
D) there has been an easing of monetary policy.

Question 9

In implementing monetary policy with respect to the Taylor Rule:

Accepted Answer

A) the central bank is willing to tolerate a 2 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate. 
B) the central bank is willing to tolerate a 5 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate. 
C) the central bank is willing to tolerate any inflation rate, and overnight lending rate. 
D) the central bank chooses an inflation target regardless of the economic situation. 
A) the central bank is willing to tolerate a 2 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate. 
B) the central bank is willing to tolerate a 5 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate. 
C) the central bank is willing to tolerate any inflation rate, and overnight lending rate. 
D) the central bank chooses an inflation target regardless of the economic situation.

Question 10

Suppose Canada is experiencing a 12 percent rate of unemployment with stable prices and a trade deficit.All else equal, the use of appropriate monetary policy to reduce unemployment would:

Accepted Answer

A) cause the dollar to appreciate in value. 
B) have no impact upon our trade deficit. 
C) decrease our trade deficit. 
D) increase our trade deficit. 
A) cause the dollar to appreciate in value. 
B) have no impact upon our trade deficit. 
C) decrease our trade deficit. 
D) increase our trade deficit.

Question 11

The price of a bond with no expiration date is $10,000 and it has a fixed annual interest payment of $2,000.If the bond is sold to a new owner for a price of $12,500, then the effective interest rate yield on the bond is now:

Accepted Answer

A) 22 percent. 
B) 18 percent. 
C) 17 percent. 
D) 16 percent. 
A) 22 percent. 
B) 18 percent. 
C) 17 percent. 
D) 16 percent.

Question 12

Open-market operations refers to:

Accepted Answer

A) purchases of stocks in the Toronto Stock Exchange. 
B) the purchase or sale of government bonds by the Bank of Canada. 
C) central bank lending to chartered banks. 
D) the specifying of margin requirements on stock purchases. 
A) purchases of stocks in the Toronto Stock Exchange. 
B) the purchase or sale of government bonds by the Bank of Canada. 
C) central bank lending to chartered banks. 
D) the specifying of margin requirements on stock purchases.

Question 13

Because of the liquidity trap, the Bank of Canada's creation of billions of dollars in excess reserves during the great recession had:

Accepted Answer

A) little or no effect on lending by the chartered banks. 
B) a significant effect on lending by the chartered banks. 
C) the effect of increasing the overnight lending rate. 
D) the effect of increasing the bank rate. 
A) little or no effect on lending by the chartered banks. 
B) a significant effect on lending by the chartered banks. 
C) the effect of increasing the overnight lending rate. 
D) the effect of increasing the bank rate.

Question 14

If the chartered banking system borrows from the Bank of Canada.

Accepted Answer

A) The demand deposits of chartered banks are unchanged, but their reserves increase. 
B) The demand deposits and reserves of chartered banks both decrease. 
C) The demand deposits of chartered banks are unchanged, but their reserves decrease. 
D) The demand deposits and reserves of chartered banks are both unchanged. 
A) The demand deposits of chartered banks are unchanged, but their reserves increase. 
B) The demand deposits and reserves of chartered banks both decrease. 
C) The demand deposits of chartered banks are unchanged, but their reserves decrease. 
D) The demand deposits and reserves of chartered banks are both unchanged.

Question 15

The bank rate is the rate of interest at which:

Accepted Answer

A) the Bank of Canada lends to chartered banks. 
B) financial institutions lend to some builders. 
C) the Bank of Canada lends to large corporations. 
D) chartered banks lend to large corporations. 
A) the Bank of Canada lends to chartered banks. 
B) financial institutions lend to some builders. 
C) the Bank of Canada lends to large corporations. 
D) chartered banks lend to large corporations.

Question 16

The Sale and Repurchase Agreement (SRA), is a transaction in which:

Accepted Answer

A) the Bank of Canada offers to sell government securities with an agreement to buy them back at a predetermined price the next business day. 
B) the Bank of Canada offers to sell government securities with an agreement to buy them back at a predetermined price the next year. 
C) the Bank of Canada offers to buy government securities with an agreement to sell them back at a predetermined price the next business day. 
D) the Bank of Canada offers to buy government securities with an agreement to sell them back at a predetermined price the next month. 
A) the Bank of Canada offers to sell government securities with an agreement to buy them back at a predetermined price the next business day. 
B) the Bank of Canada offers to sell government securities with an agreement to buy them back at a predetermined price the next year. 
C) the Bank of Canada offers to buy government securities with an agreement to sell them back at a predetermined price the next business day. 
D) the Bank of Canada offers to buy government securities with an agreement to sell them back at a predetermined price the next month.

Question 17

Generally, the prime interest rate:

Accepted Answer

A) moves in the opposite direction as the overnight lending rate. 
B) remains constant over long periods of time. 
C) is highly inflexible downward. 
D) moves in the same direction as the overnight lending rate. 
A) moves in the opposite direction as the overnight lending rate. 
B) remains constant over long periods of time. 
C) is highly inflexible downward. 
D) moves in the same direction as the overnight lending rate.

Question 18

Monetary policy in Japan during the 1990s and early 2000s was:

Accepted Answer

A) tight and effective in reducing high inflation. 
B) tight, but ineffective in reducing high inflation. 
C) expansionary and, effective in bringing the economy out of recession. 
D) expansionary but, ineffective in bringing the economy out of recession. 
A) tight and effective in reducing high inflation. 
B) tight, but ineffective in reducing high inflation. 
C) expansionary and, effective in bringing the economy out of recession. 
D) expansionary but, ineffective in bringing the economy out of recession.

Question 19

The total demand for money curve will shift to the right as a result of:

Accepted Answer

A) an increase in nominal GDP. 
B) an increase in the interest rate. 
C) a decline in the interest rate. 
D) a decline in nominal GDP. 
A) an increase in nominal GDP. 
B) an increase in the interest rate. 
C) a decline in the interest rate. 
D) a decline in nominal GDP.

Question 20

What is one of the advantages of monetary policy over fiscal policy?

Accepted Answer

A) its control over the size of Federal budget deficits 
B) the quickness with which it can be used 
C) the opportunity for broad political influence 
D) its domination of major sectors of the economy 
A) its control over the size of Federal budget deficits 
B) the quickness with which it can be used 
C) the opportunity for broad political influence 
D) its domination of major sectors of the economy

Exam 15: Part B: Interest Rates and Monetary Policy

The interest rate will fall when the:

Refer to the above market for money diagram.If the interest rate was at 8 percent, people would:

The purpose of a restrictive monetary policy is to:

An expansionary monetary policy is designed to correct a problem of high unemployment and sluggish economic growth.

In 2004, the Bank of Canada reduced the overnight rate to as low as:

An expansionary monetary policy that is used to stimulate economic growth in the domestic economy:

A headline reads: "Bank of Canada raises the overnight rate by half a point." This indicates that:

In implementing monetary policy with respect to the Taylor Rule:

Suppose Canada is experiencing a 12 percent rate of unemployment with stable prices and a trade deficit.All else equal, the use of appropriate monetary policy to reduce unemployment would:

The price of a bond with no expiration date is $10,000 and it has a fixed annual interest payment of $2,000.If the bond is sold to a new owner for a price of $12,500, then the effective interest rate yield on the bond is now:

Open-market operations refers to:

Because of the liquidity trap, the Bank of Canada's creation of billions of dollars in excess reserves during the great recession had:

If the chartered banking system borrows from the Bank of Canada.

The bank rate is the rate of interest at which:

The Sale and Repurchase Agreement (SRA), is a transaction in which:

Generally, the prime interest rate:

Monetary policy in Japan during the 1990s and early 2000s was:

The total demand for money curve will shift to the right as a result of:

What is one of the advantages of monetary policy over fiscal policy?

Part A: Limits, Alternatives, and Choices

Part B: Limits, Alternatives, and Choices

Part A: The Market System and the Circular Flow

Part B: The Market System and the Circular Flow

Part A: Demand, Supply, and Market Equilibrium

Part B: Demand, Supply, and Market Equilibrium

Part A: Market Failures: Public Goods and Externalities

Part B: Market Failures: Public Goods and Externalities

Part A: Governments Role and Government Failure

Part B: Governments Role and Government Failure

Part A: An Introduction to Macroeconomics

Part B: An Introduction to Macroeconomics

Part A: Measuring the Economys Output

Part B: Measuring the Economys Output

Part A: Economic Growth

Part B: Economic Growth

Part A: Business Cycles, Unemployment, and Inflation

Part B: Business Cycles, Unemployment, and Inflation

Part A: Basic Macroeconomic Relationships

Part B: Basic Macroeconomic Relationships

Part A: The Aggregate Expenditures Model

Part B: The Aggregate Expenditures Model

Part A: Aggregate Demand and Aggregate Supply

Part B: Aggregate Demand and Aggregate Supply

Part A: Fiscal Policy, Deficits, Surpluses, and Debt

Part B: Fiscal Policy, Deficits, Surpluses, and Debt

Part A: Money, Banking, and Money Creation

Part B: Money, Banking, and Money Creation

Part A: Interest Rates and Monetary Policy

Part A: Long-Run Macroeconomic Adjustments

Part B: Long-Run Macroeconomic Adjustments

Part A: International Trade

Part B: International Trade

Part C: Financial Economics

Part A: The Balance of Payments and Exchange Rates

Part B: The Balance of Payments and Exchange Rates

The Economics of Developing Countries

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